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R:R Fallacy?

  • #21
  • Jan 16, 2017 11:30am Jan 16, 2017 11:30am
Quoting NaughtyPip
{quote} why none?
well, if i dont know the probabilities for those trades (and i have no way to know them), how can i make a choice? both trades could be losers, regardless r;r or the poor r;r could be the winner and the other one a loser.
  • #22
  • Jan 16, 2017 11:35am Jan 16, 2017 11:35am
Quoting feline207
{quote} well, if i dont know the probabilities for those trades (and i have no way to know them), how can i make a choice? both trades could be losers, regardless r;r or the poor r;r could be the winner and the other one a loser.
There is probability in both r:r strategies. They are both the exact same trades, the second one is just a later entry nearer the target. Gun to the head you have to take 1 or the other, or both, which one do you take.
  • #23
  • Jan 16, 2017 11:45am Jan 16, 2017 11:45am
Here is why I would take trade 1, Double bottom, trend break very high probability. In this example I would be assuming something of that nature is occurring.


As for the new screenshot highlighted, if the proper management is taken into consideration and the proper tool is used, very easily a partial close could be taken part way to the full target and a trailing stop activated, or some other form of position management that removes emotions as a trader. Such as take profit at a certain percentage of target, the target itself and then allowing a third position for any further gains higher.


**** Im in now way promoting this tool, but I use it cuz its works and allows for just that, partial close with activation of trailing stop, with some other forms of trailing stop https://www.mql5.com/en/market/product/4217. !
Attached Image (click to enlarge)
Click to Enlarge Name: Why Stress2.png Size: 50 KB
Learn, a forex trader must, unlearn and relearn he will.
  • #24
  • Jan 16, 2017 11:47am Jan 16, 2017 11:47am
Quoting NaughtyPip
For those of you that would take trade 1 but not trade 2 You take trade 1 and price climbs up and your chart looks like this: {image}
No it doesn't. It looks like this:

Attached Image (click to enlarge)
Click to Enlarge Name: grab.png Size: 23 KB
  • #25
  • Jan 16, 2017 11:53am Jan 16, 2017 11:53am
Quoting COGSx86
Here is why I would take trade 1, Double bottom, trend break very high probability. In this example I would be assuming something of that nature is occurring. As for the new screenshot highlighted, if the proper management is taken into consideration and the proper tool is used, very easily a partial close could be taken part way to the full target and a trailing stop activated, or some other form of position management that removes emotions as a trader. Such as take profit at a certain percentage of target, the target itself and then allowing a...
Forget the technical analysis. This is about R:R. The lines i drew on that painting were random squiggles and don't mean anything.

Lets say you have a profitable strategy where you usually risk 1 to make 4 (r:r 1:4). Your setup forms (trade 1) and you enter. Trade 2 is the exact same setup but you missed the entry at trade 1. Will you take trade 2 entry?
  • #26
  • Jan 16, 2017 11:54am Jan 16, 2017 11:54am
Quoting simond2002
{quote} No it doesn't. It looks like this: grab.png;2142336 {image}
there is no option to move the stop loss.
  • #27
  • Jan 16, 2017 11:56am Jan 16, 2017 11:56am
Quoting simond2002
{quote} No it doesn't. It looks like this: grab.png;2142336 {image}
still, if you could move your stop loss and there was a higher low to hide your stop behind, you would move your stop to there? You would now be risking 20 pips to make 10
  • #28
  • Jan 16, 2017 12:03pm Jan 16, 2017 12:03pm
Quoting NaughtyPip
{quote} still, if you could move your stop loss and there was a higher low to hide your stop behind, you would move your stop to there? You would now be risking 20 pips to make 10
OK, so what's your point?
  • #29
  • Jan 16, 2017 12:07pm Jan 16, 2017 12:07pm
You have to question everything. Question yourself, question your doubts, question if they are deep enough.
Question what your doubts are missing (we always miss something), but there is a psychological aspect driven by emotions. We need to feel that we are complete, that we have reached our goals.
There is a fallacy here, the moment we enter in the state of completness, the moment that our brain is not more in a state of warning then we stop to make progress.
Our brain sits down and start relaxing. We stop exploring new boundaries.
The brain protects itself from you and it is ready to do whatever it takes to survive.

People tend to predict the future for one reason (at least one but I think this is the most important).
Predicting the future is the less painful way for your mind.
Predicting the future makes you feel more relaxed and secure - and your brain loves this situation.

So back to your image.
I wouldn't take any of that two situations but I think that most of people would take the first one.
There is one thing to say, the effect on the brain when we lose is higher than when we win.
This is why the target is bigger than the loss.. "I'm going long with a stop of 15 pips, let me place a target of 50 pips, I will get them YESSS with a tight stop loss so I'm risking nothing".
How many times did you think that?
Here is the power of compounding in action, 15 pips loss today, 15pips loss tomorrow, 15pips loss the day after.. and your account is gone.
Small losses compared to your potential winnings so your brain can afford to take a loss but in the end your account is gone.
Pay attention that I'm not saying your stop must be bigger/smaller than your target.

Also I would add that sometimes situation 1 can become situation 2.
You open the trade, it goes against you and instead of closing it you increase your stop, potentially reaching a sitation where your stop is bigger than your fixed target.
So as I said my answer is most of the people would take situation 1 but I also think that 1 and 2 are correlated.

Alex
  • #30
  • Jan 16, 2017 12:14pm Jan 16, 2017 12:14pm
Quoting NaughtyPip
{quote} Forget the technical analysis. This is about R:R. The lines i drew on that painting were random squiggles and don't mean anything. Lets say you have a profitable strategy where you usually risk 1 to make 4 (r:r 1:4). Your setup forms (trade 1) and you enter. Trade 2 is the exact same setup but you missed the entry at trade 1. Will you take trade 2 entry?

Ya but you cant trade without them coinciding together, R:R and technical analysis that is. As in taking trade 1 your already in the money, You have made 30 pips with a much larger lot size because your SL is so tight, you can risk more and your trading from a much higher probable out come.


Trade 2 your lot size would need to be much smaller, because your risking that much more capital and in a lower probable area for continuation. Risk is so high at that point.

In a comparison and probabilities example, Trade 1 is what traders should be looking for, trading at a much higher probable turning point.
Learn, a forex trader must, unlearn and relearn he will.
  • #31
  • Jan 16, 2017 12:15pm Jan 16, 2017 12:15pm
Quoting simond2002
{quote} OK, so what's your point?
My point is that most people will not take a trade where their risk:reward is skewed i.e. risking 40,30 or even 20 pips as in the example you gave to make 10, yet when they enter a trade risking 10 pips to make 40 and the trade goes well and price climbs, there will be a point where the R:R flips around and you are now risking a more pips to make few, which is no different to taking trade 2.
  • #32
  • Jan 16, 2017 12:25pm Jan 16, 2017 12:25pm
There is no statistical advantage between either trade and both trades will require the same size edge to stay profitable. The only difference will be the number of wins and losses and the sizes of the wins and losses. At the end of the day though, if both trades had the same size edges, the results would be the same.

Say Trade #1 is risking 10 pips for 40 pips. Trade #2 is risking 40 pips or 10 pips. The spread is 2 pips.

When you enter trade #1, you will actually be 8 pips from your SL and 42 pips from your TP.

When you enter trade #2, you will actually be 38 pips from your SL and 12 pips from your TP.

This means your win rates required to break even become skewed in order to make up for the spread.

You can see that regardless of if you are risking 1:4 or 4:1, you need to have an edge of more than 4% the normal BE win rate in order to be profitable.
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  • #33
  • Jan 16, 2017 12:33pm Jan 16, 2017 12:33pm
Quoting COGSx86
{quote} As in taking trade 1 your already in the money, You have made 30 pips with a much larger lot size because your SL is so tight, you can risk more and your trading from a much higher probable out come.
Trade 1 you perhaps lost a couple times before you found a trde that climbed towards your target. You now have 30 pips unrealised profit and 10 pips stop meaning you are currently have 40 pips of equity at risk. Trade 2 you enter at the late stage and you also have 40 pips of equity at risk.

Quoting COGSx86
{quote} Trade 2 your lot size would need to be much smaller, because your risking that much more capital and in a lower probable area for continuation. Risk is so high at that point. In a comparison and probabilities example, Trade 1 is what traders should be looking for, trading at a much higher probable turning point.
I don't understand why you think entering at trde 2 is a 'lower probable area, it is high probability area because A you are closer to the target and B you have the luxury of knowing the wind is in your sails i.e. price is heading the way you want it to go. You have none of these in your favour when you are entering trade 1.
  • #34
  • Jan 16, 2017 12:44pm Jan 16, 2017 12:44pm
Please read this and tell me your opinion:

The Fallacy of Using SL/TP as Proxy Risk-Reward

Forex trading forums are full of well meaning, yet rather misguided advice about risk-reward setups and how to set your stop losses. Unfortunately, many of these people fail to understand the true meaning of risk or reward.
The idea that simply setting your stop loss smaller than your take profits will achieve a certain risk reward is complete nonsense.
Using risk/reward to set your trade entry and exits does not make any sense unless you know the probability of outcomes in a given trade.
Take this simple example. Suppose there is a lottery costing $1 to enter. The prize is $1m. By the definition of the nave trader, this gives:
Risk: $1
Reward: $1m
Reward/Risk ratio: 1,000,000
By that definition, this would seem a fantastic game to play. However, suppose we know that two million people enter the lottery. This makes the odds of winning 1:2,000,000 (one in two million). Now we know the odds, we can calculate the true risk reward:
True risk: p(loss) x E(loss) = (1- 1/2000000) x ($1)
True reward: p(win) x E(win) = (1/2000000) x ($1,000,000)
True reward/risk ratio: 0.5
In other words, for every $1 you put into this lottery, youd expect to get 50 cents back. Most would now agree this is not a very good game. Even though on the nave traders reckoning, it had a reward to risk ratio of one million.
This example highlights the fallacy of using stops and take profits as a measure of your risk/reward.
In a trade, we have the real risk/reward defined by:
Reward: p(win) x E(win)
Risk: p(lose) x E(lose)
Reward/Risk ratio: p(win) x E(win) / p(lose) x E(lose)

E(win) is the expected payoff in the trade, namely your take profit amount. E(lose) is your stop loss amount.
  • #35
  • Jan 16, 2017 12:45pm Jan 16, 2017 12:45pm
Quoting NaughtyPip
are you saying that neither r:r strategy is better than the other? They are equal?
Yes, given the information that you've provided.
  • #36
  • Jan 16, 2017 12:53pm Jan 16, 2017 12:53pm
Quoting Sis.yphus
There is no statistical advantage between either trade and both trades will require the same size edge to stay profitable. The only difference will be the number of wins and losses and the sizes of the wins and losses. At the end of the day though, if both trades had the same size edges, the results would be the same.
Exactly.
  • #37
  • Jan 16, 2017 1:04pm Jan 16, 2017 1:04pm
Quoting illiquid
Please read this and tell me your opinion.....
In your lottery example, you know the number of tickets, and therefore the probability of winning (1 chance in 2 million). Hence you can calculate expectancy.

Whereas in trading, the only way of estimating the probability of a given setup is by examining historical results of similar setups, but the current composition of the market, and the beliefs or agendas of the participants, is never the same as it was historically. Hence you can not accurately calculate expectancy. You can only perform analysis from the info that you have, and trust, and then make your best guess. TooSlow explains it simply, but well, here:
Quoting TooSlow
The market doesn't care about the reason you entered. When you win, it is because other people came into the market and made the market move in your direction. When you lose, it is because other people came into the market and made the market move against your direction.
  • #38
  • Jan 16, 2017 1:09pm Jan 16, 2017 1:09pm
Quoting hanover
{quote} In your lottery example, you know the number of tickets, and therefore the probability of winning (1 chance in 2 million). Hence you can calculate expectancy. Whereas in trading, the only way of estimating the probability of a given setup is by examining historical results of similar setups, but the current composition of the market, and the beliefs or agendas of the participants, is never the same as it was historically. Hence you can not accurately calculate expectancy. You can only perform analysis from the info that you have, and trust,...
I would be careful quoting me, hanover.
Next thing you know, you'll wind up on a few ignore lists.
Some people do not like having their belief systems annihilated.
My Threads: Trading is as simple as 1-2-3, Highest Open / Lowest Open Trade
  • #39
  • Jan 16, 2017 1:14pm Jan 16, 2017 1:14pm
My answer: it depends on your trading style and risk preference. I would take the trade #1 but some might see trade #2 is more profitable.
Forex? Futures?
Jeremy Jongsuk Oh All Time Return: 599.2%
  • #40
  • Jan 16, 2017 1:15pm Jan 16, 2017 1:15pm
8 pip spread............wowza, brokers still offer such poor spreads nowadays?

Anyways a trader must consider account balance, risk% and SL!!! If you, dont your never gonna make any money!!!

Trade 1;

Account Balance - 10000$ Base currency USD
Risk % - 2
SL - 10 pips
Lots size - 1.5

Lets use GBPUSD today you:

Buy: 1.2040 TP
TP: 1.208 (40 pips)
Costs - 7$ per 100k ( I use paybackfx get 1.5$ rebates per 100k on my commission)
SL: 1.203 Risk (150+(7-1.5))


600$ - (10.5$ commission + 2.25)
589.5+2.25$

Profit = 591.75$

Trade 2:

Account Balance - 10000$ Base currency USD
Risk % - 2
SL - 40
Lot Size - .38

Buy - 1.206
TP - 1.207
Costs - 7$ - 1.5$
SL 1.203 Risk 114$ (plus broker costs)

38$ - (2.66-.57)

Profit = 35.91$

edit- adjusted risk value
Learn, a forex trader must, unlearn and relearn he will.
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