Are Risk/Reward ratios simply nonsense? | Page 2 | Forex Factory

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Are Risk/Reward ratios simply nonsense?

  • #21
  • Dec 5, 2012 6:13am Dec 5, 2012 6:13am
Quoting burnzmeister
I guess it depends on your style of trading. I try to profit from short-term market inefficiency/volatility, so I don't worry about the trend thereafter, not at the moment anyway. The hardest thing, for me, is to let profits run.
Yeah...and if you have a fixed TP you can't ever let profits run
  • #22
  • Dec 5, 2012 6:17am Dec 5, 2012 6:17am
Quoting 4exNinja
Yeah...and if you have a fixed TP you can't ever let profits run
You must be a genius lol
Most people have the will to win, few have the will to prepare to win
  • #23
  • Dec 5, 2012 6:34am Dec 5, 2012 6:34am
Quoting burnzmeister
You must be a genius lol
If I were I'd be chilling at a private island in the Pacific instead of posting on FF during work

The point's still valid though, using a fixed TP limits your upside potential and I just don't see the point in that...unless you're scalping on super low time frames using extreme leverage.

I like to let my trades run as long as possible...something I wasn't able to do when I used fixed TP. Once I realised that I'm missing out on all those sweet 100pip+ moves by limiting myself to a fixed 50pip TP, I changed my approach. Those large moves can have a pretty strong impact on your overall profitability.
  • #24
  • Dec 5, 2012 6:50am Dec 5, 2012 6:50am
Quoting 4exNinja
If I were I'd be chilling at a private island in the Pacific instead of posting on FF during work

The point's still valid though, using a fixed TP limits your upside potential and I just don't see the point in that...unless you're scalping on super low time frames using extreme leverage.

I like to let my trades run as long as possible...something I wasn't able to do when I used fixed TP. Once I realised that I'm missing out on all those sweet 100pip+ moves by limiting myself to a fixed 50pip TP, I changed my approach. Those large...
I'd second that mate. Cocktails on the beach, hmmm!

Okay, so what indies and/or decision making process do you use to determine whever or not a trend is coming to an end? I personally trade from the H1 and H4 TFs, because I have a desk job too.

This is a bit off 'thread topic'. Sorry WideEyed
Most people have the will to win, few have the will to prepare to win
  • #25
  • Dec 5, 2012 7:09am Dec 5, 2012 7:09am
Quoting burnzmeister
I'd second that mate. Cocktails on the beach, hmmm!

Okay, so what indies and/or decision making process do you use to determine whever or not a trend is coming to an end? I personally trade from the H1 and H4 TFs, because I have a desk job too.

This is a bit off 'thread topic'. Sorry WideEyed
Same here, trading the H1 and since last week increasingly the H4 charts. I'm playing around with that "Cave Manager" EA using the following settings:

1) Initial stop loss of 15 pips...sometimes that's 12 pips, sometimes 18.
2) SL set to BE once 15pips have been achieved.
3) Once 30pips of profit have been achieved a trailing stop of 15pips is applied.
4) At 50pips profit my SL trails at 33% of profit behind the current price. So if at any given time after making 50pips profit drops by more than 33% I get kicked out.

In very few occasions I override this by manually exiting...but that's based on my indicators and it would take too long to explain here.

So far that's working quite well...but I'm still refining those settings, will take me a few weeks of forward testing

Sometimes I get kicked out at BE a few times before it really takes off...but I don't mind having to enter more than once because the benefit is in never having massive draw downs. Having a stressful job I can't deal with large draw downs. The SL system seems to allow me to stay in trades for quite some time, letting profits run.

As for the system in general, I'm suing THV/Pipware. Don't want to derail the thread, just look up the 2 threads about it if you're interested...I'm mostly in the one showing trade examples (the "patterns" thread).
  • #26
  • Dec 6, 2012 2:14am Dec 6, 2012 2:14am
Quoting WideEyed
If the odds of the price rising are the same as the odds of the price falling ... why would you trade?
You didn't understand my comment.
  • #27
  • Dec 6, 2012 2:16am Dec 6, 2012 2:16am
While subjective (like almost everything else in trading), there are some good setups where you can define risk and reward fairly easily. Take a look at the attached chart of USD/JPY. You can see price has been ranging between support and resistance for a while. Say we want to try to play this - we set a trade at support and wait for price to get there. We place a stop-loss under support where price is unlikely to reach except if the level were to fail. We can define the distance from the entry to the stop loss as our risk in pips. We can then look at what we stand to gain. You can see that even if you play the smaller S/R zones (which I ignore for the most part), there is a potential reward several times your risk. In this case, a bounce to the resistance zone at the top would have yielded 8x your risk; I missed this move by a few pips unfortunately. These kinds of calculations should be done before you place an order, although I'm well aware many people never look at R/R until the trade is done, which completely defeats the purpose of trying to seek out good opportunities.
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  • #28
  • Dec 11, 2012 8:28pm Dec 11, 2012 8:28pm
Quoting Kanzler
While subjective (like almost everything else in trading), there are some good setups where you can define risk and reward fairly easily. Take a look at the attached chart of USD/JPY. You can see price has been ranging between support and resistance for a while. Say we want to try to play this - we set a trade at support and wait for price to get there. We place a stop-loss under support where price is unlikely to reach except if the level were to fail. We can define the distance from the entry to the stop loss as our risk in pips. We can then look...
And, the result. So is risk/reward really nonsense? Judge for yourself.
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  • #29
  • Dec 12, 2012 1:37am Dec 12, 2012 1:37am
In my opinion only: I typically like to revert back to common sense when it comes to stuff like this. If risk to reward doesn't matter, then we should all start placing trades with a stop loss 3 times bigger than the take profit. Of course, I'm joking. That would be a terrible idea. It's a terrible idea because it's using a bad risk to reward technique, versus a good risk to reward technique.

A popular introduction of random entries (coin flip style) in the market with trailing stops (meant for random, large profits and so forth) was introduced by Van Tharp in this book: http://www.amazon.com/exec/obidos/AS...utotradblog-20

I figured it was mentioned before on this forum, and it was: http://www.forexfactory.com/showthread.php?t=81071

From a scientific standpoint, if you can prove random entries in the market can still be profitable without good risk to reward, I suppose there's a case. I've yet to see this outside of high frequency trading literature, which isn't really about making money as much as it is about skipping lines. Surprisingly, however, a lot of CTAs and other professionals use inverted risk to reward systems. I'm extremely skeptical of those on the long curve.

Just my two cents, risk to reward matters for the long haul. It may not matter for a decade, a couple years, or a few months, but for your lifelong career... it will matter.

#FXFUSE
  • #30
  • Dec 12, 2012 4:40am Dec 12, 2012 4:40am
Sorry I'm not replying individually to all the above posts.

Consider two traders using different systems/methods that work for them. They both set SL at x pips and TP at 3x pips. Trader A consistently sees 80% of his trades hitting TP. Trader B consistently sees 60% of his trades hitting TP. All the rest of their trades get taken out at the SL.

Based on how many here calculate R:R, those two traders have exactly the same ratio whereas we know that trader A has only a 20% chance of failure while trader B has a 40% chance of failure.

R:R isn't a function of just SL and TP.
  • #31
  • Jan 25, 2013 1:05am Jan 25, 2013 1:05am
That's right, risk to reward won't make any bit of difference if you never seek out maximum rewards. IMO stop losses are the easy part. Letting trades run correctly, that's fairly difficult, but can be done. The biggest challenge with viable systems run by humans is that the humans stop when they hit a losing streak. This is typically the kiss of death. Again, on VIABLE systems used correctly, in the correct market, by a sharp trader.

Not easy.

#FXFUSE

Quoting WideEyed
Sorry I'm not replying individually to all the above posts.

Consider two traders using different systems/methods that work for them. They both set SL at x pips and TP at 3x pips. Trader A consistently sees 80% of his trades hitting TP. Trader B consistently sees 60% of his trades hitting TP. All the rest of their trades get taken out at the SL.

Based on how many here calculate R:R, those two traders have exactly the same ratio whereas we know that trader A has only a 20% chance of failure while trader B has a 40% chance of failure.

R:R...
  • #32
  • Jan 25, 2013 3:12am Jan 25, 2013 3:12am
Quoting gojoe
In my style of trading, i set the stop loss at the point of, "if the market proves me wrong, i am out." The only trades i will take are trades that have a good chance of hitting a 2:1 reward/risk ratio.

Using a reward/risk ratio is just simple way of saying "let profits run, cut losses short." A ratio gives a trader actual values for when to cut losses short and when to take a profit. This helps keep emotions from dictating when and where a trader should exit.
"if the market proves me wrong, i am out."
I see this quite often, yet never seem to see anyone stop and reverse.
If you have entered a long trade because you have a bullish bias, when the market proves you wrong, why not then enter a short trade?
Please Do Not PM Me With Coding Enquiries
  • #33
  • Jan 25, 2013 3:17am Jan 25, 2013 3:17am
play with the market do not let it play with you
  • #34
  • Jan 25, 2013 7:58am Jan 25, 2013 7:58am
Quoting Gumrai
"if the market proves me wrong, i am out."
I see this quite often, yet never seem to see anyone stop and reverse.
If you have entered a long trade because you have a bullish bias, when the market proves you wrong, why not then enter a short trade?
I would not consider entering an opposite trade just because I was stopped out. First of all, it is illogical to open a trade in the opposite direction without any signal. Second of all, this type of trading is noisy and messy, in both a psychological standpoint and strategic standpoint.

The market may prove my signal to be invalid for this trade, but if there is no reason to change my bias on the market, why change it?

Lastly, my job as a trader is to spot high probability setups (for me, that would include price action signals. ie: pinbars, inside bars). Since all I am looking for are these high probability setups, I do not think about getting stopped out and entering a trade in the opposite direction. I know that when using a 2:1 reward/risk ratio, I only need to win 33.3% of my trades to break even.
  • #35
  • Jan 25, 2013 12:58pm Jan 25, 2013 12:58pm
Quoting Gumrai
If you have entered a long trade because you have a bullish bias, when the market proves you wrong, why not then enter a short trade?
A very general statement IMO. The 'obvious' answer is that it depends on our system rules, whatever they might be, in each given situation.

If we don't have rules, or our rules are unproven (by proof, I mean either through a significant amount of trading experience, or historical testing to the point of statistical validity) then we're merely guessing.
  • #36
  • Jan 25, 2013 5:04pm Jan 25, 2013 5:04pm
I'll leave the reward side of this discussion for a later date. As for risk, it is important to understand that there are several dimensions to risk that a trader needs to consider. First, the difference between your entry and the SL is not risk, it is a loss, and I agree with whoever stated that you should expose less than 2% if your margin to a potential loss on any given trade. The risks you must consider before entering a trade depend on your trading strategy. For example: 1.) What ever your system, find the best time of day that your system will produce positive results (for example, perhaps you should only trade the first 2 hours of the London session), and avoid trading outside that time frame. If you know this, and you decide to trade outside the established timeframe, then you are taking on more risk than your system is designed for, and your losses will likely increase. 2.) Understand the optimal market structure for your trading system, and only trade when that market structure is present. So, if a trade set up presents itself in a market structure that is not optimal, you pass on it, knowing that if you take the trade, you'll increase losses.

There are other dimensions of risk to think about each day, but I've run out of time here. You can do nothing to mitigate risks once you've entered a trade (face it, stuff happens), but you have complete and total control over understanding and awareness of the risks that are important to your trading system.

For me, finding a logical place to set a SL depends on the TA within market structure. I can usually find several trading opportunities each day that offer potential increases at least 3x the potential loss, with a SL rarely more than 25 pips below entry. For me, staying in a trade to targets depends on PA as the market approaches the targets. Reaction is key (for me). Otherwise, I pass and wait for a better trading opportunity. That is just my trading style and not meant to be "the best" or "the only" way to trade.
  • #37
  • Jan 25, 2013 10:55pm Jan 25, 2013 10:55pm
It comes down to psychology, time, and technology. Those are the three main reasons. Psychologically people don't want another potential immediate loss, which they know is possible on every trade. Then there is time, as some people cannot sit around to trigger another key reversal trade. Then the other is technology. For example, have you ever noticed how laughable the most popular retail FX trading platform in the world is? No orders cancels orders, no stop and reverse, and I could go on and on. It's just pathetic. I use custom scripts now for my own stop and reverse methodology when in Metatrader.

Not to bash the most popular retail execution tool in the world, but it's unavoidable. Built for programmers!


Quoting Gumrai
"if the market proves me wrong, i am out."
I see this quite often, yet never seem to see anyone stop and reverse.
If you have entered a long trade because you have a bullish bias, when the market proves you wrong, why not then enter a short trade?
  • #38
  • Jan 26, 2013 1:24am Jan 26, 2013 1:24am
Quoting WideEyed

In the meanwhile, the real risk is dependent on various technical, fundamental and market sentiment influences.
Agreed, but the main problem people cant detect technical, fundamental side so they dont take high risk.
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  • #39
  • Feb 24, 2023 2:47pm Feb 24, 2023 2:47pm
If my trading strategy gives me a positive expectancy, with a negative risk:reward, how can anyone tell me I'm doing it wrong?

So many rules. I wonder why no one wins

In my opinion risk:rwds of 1:2 or 1:3 imply that you can call tops and bottoms. You can't call tops and bottoms. That's why the win rate is low. That's just not the game I want to play.

Your success mostly comes from being on the right side of the trend, whether you realize it not.
  • #40
  • Last Post: Feb 25, 2023 3:39am Feb 25, 2023 3:39am
Quoting WideEyed
Sorry for the provocative looking title, but most of what I've been reading on these forums about risk / reward seems to treat their calculation as simply the difference between opening price and SL/TP ... albeit SL and TP prices derived from (perceived) S/R or trend or phases of the moon. However, as both the SL and TP are subjective figures drawn by the trader himself, they are irrelevant till one of them is activated. They are simply dots on a screen and have no direct influence on risk (except to the extent that SL may attract stop hunters in...

Let p - the odds that price reaches Take Profit,
1-p - the odds that price reaches Stop loss

What you want to achieve is positive expectancy of a trade or:

p * Reward + (1-p) * Risk > 0

p / (1-p) > -Risk / Reward

Take for example Risk/Reward of 2:3. This could mean for example, that we want to earn 30 pips, risking -20 pips per trade. From the inequality above we can proceed with this trade if

p / (1-p) > 2/3

or 3p > 2 - 2p
5p > 2, i.e. the odds are more than 40% of reaching TP or less than 60% of reaching SL first.
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