I can't seem to find a good risk/reward ratio. Please help.

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trade2finind

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I'm a daytrader and trying to maintain good money mgt. Still, I am not sure on what my risk/reward ratio should be and am wondering how you guys have developed yours. My understand of a good ratio setup is, say, you should stop loss at -2 ticks and sell at +5 ticks from your buy price, and assuming that one's accuracy rate is near 50% and the $ amount of the +5 ticks is greater than the $ loss of the -2 ticks, then one should be set up profit in the long-run.

Can someone please correct if above is wrong and also tell how you reached your ratio setup? All advice is welcomed. Thanks.
 
i dont even understand what youre saying here

you said, stoploss at -2 pips and if market went up 5 pips then you sell? are you talking about strategy? but it seems you were asking about risk/reward ratio?
 
Sorry, I don't know how to phrase what I want to seek help on. I mean, I just can't find the right groove based on my trading pattern. I'm not sure if that means risk/reward ratio or strategy...maybe a combination of both?

If it helps, my accuracy rate is at 77% but my gains have been quite small and my few losses have been huge, hence my account is lower than my starting capital. I'm not sure where to go from there in terms of tinkering w/ my -2 and +5 setup or is there something else that I should look into? Thanks.
 
trade2finind said:
Sorry, I don't know how to phrase what I want to seek help on. I mean, I just can't find the right groove based on my trading pattern. I'm not sure if that means risk/reward ratio or strategy...maybe a combination of both?

If it helps, my accuracy rate is at 77% but my gains have been quite small and my few losses have been huge, hence my account is lower than my starting capital. I'm not sure where to go from there in terms of tinkering w/ my -2 and +5 setup or is there something else that I should look into? Thanks.
Click to expand...

If your accuracy is 77% and you have a 1/2.5 RR, your account should not be @ negative. You are during something wrong and I'm not sure I know what it is. You said you are risking 2 to make 5 right? For every 10 trade you make you should win 7 lose 3 @ a 77% accuracy. So that means you should have a total of 35 winning points and 6 losing points for a net total of +29 points. Maybe your accuracy is not what you think it is? If you are trading the forex market, you can't have a 2 pips stop loss. You'll get stoped out on every trades. But 1/2.5 is a good RR to have. Even if your accuracy is 40%, you would still be positive. Let me know if this helps or if I can help you further
 
Reduce position size and give yourself some breathing space.
 
Matrixtrader1 said:
If your accuracy is 77% and you have a 1/2.5 RR, your account should not be @ negative. You are during something wrong and I'm not sure I know what it is. You said you are risking 2 to make 5 right? For every 10 trade you make you should win 7 lose 3 @ a 77% accuracy. So that means you should have a total of 35 winning points and 6 losing points for a net total of +29 points. Maybe your accuracy is not what you think it is? If you are trading the forex market, you can't have a 2 pips stop loss. You'll get stoped out on every trades. But 1/2.5 is a good RR to have. Even if your accuracy is 40%, you would still be positive. Let me know if this helps or if I can help you further
Click to expand...

That's my problem right now: I don't have a RR of 1/2.5, ideally I want that RR but I'm not doing it. Realistically, I am actually risking 4 ticks and don't really have a set reward side. I trade in warrants based on the Hang Seng Index and for a 4 tick risk, a 6 tick reward is needed just to offset it, meaning if -4 tick=$100 loss, a +6 tick would be $100 gain. However, the reason I chose -4 is because I wanted to give myself some more margin for error and in terms of giving space, it is good because I only got stopped ~23% of the time. Problem with me is whenever I choose a winning warrant, I just take profit at around +1, +2 or +3, which are unfortunately not enough to offset the -4s, even though the latter are few. I just can't figure out what I should be doing in terms of RR or strategy.

TWI said:
Reduce position size and give yourself some breathing space.
Click to expand...

I have reduced my position size to the absolute min and set it up so that even +1 tick would give me a profit (any lower size and I would have to get at least +2 ticks). As I said above, I am currently giving myself -4 ticks as the risk side but I know it must be wrong because my reward side is so low. I just don't know how to adjust from here.

Thanks and looking forward to your advice.
 
trade2finind said:
That's my problem right now: I don't have a RR of 1/2.5, ideally I want that RR but I'm not doing it. Realistically, I am actually risking 4 ticks and don't really have a set reward side. I trade in warrants based on the Hang Seng Index and for a 4 tick risk, a 6 tick reward is needed just to offset it, meaning if -4 tick=$100 loss, a +6 tick would be $100 gain. However, the reason I chose -4 is because I wanted to give myself some more margin for error and in terms of giving space, it is good because I only got stopped ~23% of the time. Problem with me is whenever I choose a winning warrant, I just take profit at around +1, +2 or +3, which are unfortunately not enough to offset the -4s, even though the latter are few. I just can't figure out what I should be doing in terms of RR or strategy.



I have reduced my position size to the absolute min and set it up so that even +1 tick would give me a profit (any lower size and I would have to get at least +2 ticks). As I said above, I am currently giving myself -4 ticks as the risk side but I know it must be wrong because my reward side is so low. I just don't know how to adjust from here.

Thanks and looking forward to your advice.
Click to expand...

I don't know anything about trading warrents, but it sounds like you have traders fear.:eek: You sound like you don't have confidence in you trading stratergy. You probably need to paper trade for a while to test out your strategy and build up your confidence. I always say trading is 90% psychology and 10% technic. If you are emotionally imvolve in trading, you will make a loser out of a good strategy and great plan. Good luck

ps check out my blog
 
Matrixtrader1 said:
I don't know anything about trading warrents, but it sounds like you have traders fear.:eek: You sound like you don't have confidence in you trading stratergy. You probably need to paper trade for a while to test out your strategy and build up your confidence. I always say trading is 90% psychology and 10% technic. If you are emotionally imvolve in trading, you will make a loser out of a good strategy and great plan. Good luck

ps check out my blog
Click to expand...

Problem is I don't think that I have a 'strategy' per se. I mean, having a solid stop at -4 but no real reward side target is bad, I realise that. I just don't know how to go from there.

What if all the trades to date I have entered into only provide +3 ticks max, then should I lower my risk side to just -2 or even -1? Have you heard of traders using that tight of a stop?

Where can I find your blog? Thanks.
 
If you have no strategy, you shouldn't be trading. Get a demo account, figure something out, then when you've figured something out, go back to live.
 
shadowninja said:
If you have no strategy, you shouldn't be trading. Get a demo account, figure something out, then when you've figured something out, go back to live.
Click to expand...

I don't understand: I signed up for your ShadowNinja Death Trading System...shouldn't I be making millions now? (n)

I want a refund! :p :cheesy:

I have a strategy, albeit a very weak and undisciplined one. I'll see how it goes w/ some tinkering.
 
trade2finind said:
However, the reason I chose -4 is because I wanted to give myself some more margin for error and in terms of giving space, it is good because I only got stopped ~23% of the time. Problem with me is whenever I choose a winning warrant, I just take profit at around +1, +2 or +3, which are unfortunately not enough to offset the -4s, even though the latter are few. I just can't figure out what I should be doing in terms of RR or strategy.
Click to expand...

You are looking for something that cannot be found.

If you have a stop loss of -4 and you get out at +1, then OF COURSE you will be getting 20%+ winners.

Think about it - if you did a coin toss to decide your entry, you would get similar results as the market is more likely to move 1 point than it is to move 4 points. This is probability.

Formula for probability of winning with stop loss/win ration....

%win rate = (100 / profit ticks + stop loss ticks) x stop loss ticks.

If you have an edge with any particular profit:stop loss ratio, then you will be winning more than the % win rate in the above formula.

If you don't have an edge - then your win rate over time will be the above and you will lose. If this IS the case, then stop trying to manipulate this ration because it will not make you more profitable.
 
pedro01 said:
You are looking for something that cannot be found.

If you have a stop loss of -4 and you get out at +1, then OF COURSE you will be getting 20%+ winners.

Think about it - if you did a coin toss to decide your entry, you would get similar results as the market is more likely to move 1 point than it is to move 4 points. This is probability.

Formula for probability of winning with stop loss/win ration....

%win rate = (100 / profit ticks + stop loss ticks) x stop loss ticks.

If you have an edge with any particular profit:stop loss ratio, then you will be winning more than the % win rate in the above formula.

If you don't have an edge - then your win rate over time will be the above and you will lose. If this IS the case, then stop trying to manipulate this ration because it will not make you more profitable.
Click to expand...

I mean that the winners I picked (77% of the time) do go up to +3 ticks but I usually take profit anywhere from +1 to +3 (so not +3 all the time), therefore I do not maximise profit. The other 23% of the time I get stopped at -4 ticks. I am wondering if RR of +3/-2 ticks is feasible, meaning that I just tighten my stop from -4 to -2.
 
trade2finind said:
Problem is I don't think that I have a 'strategy' per se. I mean, having a solid stop at -4 but no real reward side target is bad, I realise that. I just don't know how to go from there.

What if all the trades to date I have entered into only provide +3 ticks max, then should I lower my risk side to just -2 or even -1? Have you heard of traders using that tight of a stop?

Where can I find your blog? Thanks.
Click to expand...

Again I don't trade warrents, but don't guess on weather or not these trades only produced +3 ticks max. Go back and backtest them. keep a trading log on each trade for data you can refer back to answer these question that you are asking. I don't know your trading style, but by chatting with I can tell that you don't know what you are doing. So before you blow-up you live account, I urge you educate yourself. Find a strrategy that suits you and practice it (paper trade). Trading involves a lot off skill and it takes practice. If you attach some charts of the warrents you are trading maybe that I can download, maybe I can show you some technical analysis.


ps you can find my blog by clicking Matrixtrader1 and find post.
 
trade2finind said:
I mean that the winners I picked (77% of the time) do go up to +3 ticks but I usually take profit anywhere from +1 to +3 (so not +3 all the time), therefore I do not maximise profit. The other 23% of the time I get stopped at -4 ticks. I am wondering if RR of +3/-2 ticks is feasible, meaning that I just tighten my stop from -4 to -2.
Click to expand...

Re-read what I said. Use the formula. If you get out at 1 point with a 4 point stop loss, then of course you will expect:

%win rate = (100 / profit ticks + stop loss ticks) x stop loss ticks.

%win rate = (100 / 1 + 4) x 4

= 80%

It does not matter what the price does after you exit. All you will see there is the results of something called 'confirmation bias'. But if you must.....

4 point stop loss, 3 point target = 57% win rate WITH NO PROFIT. So of course, many of your 80% winners will go on to make 3 points.

you have no edge - your entry is random, your results are down to basic laws of probability.
 
Matrixtrader1 said:
Again I don't trade warrents, but don't guess on weather or not these trades only produced +3 ticks max. Go back and backtest them. keep a trading log on each trade for data you can refer back to answer these question that you are asking. I don't know your trading style, but by chatting with I can tell that you don't know what you are doing. So before you blow-up you live account, I urge you educate yourself. Find a strrategy that suits you and practice it (paper trade). Trading involves a lot off skill and it takes practice. If you attach some charts of the warrents you are trading maybe that I can download, maybe I can show you some technical analysis.


ps you can find my blog by clicking Matrixtrader1 and find post.
Click to expand...

Thanks in advance for offering to analyse my charts and I'll check out your blog too.


pedro01 said:
Re-read what I said. Use the formula. If you get out at 1 point with a 4 point stop loss, then of course you will expect:

%win rate = (100 / profit ticks + stop loss ticks) x stop loss ticks.

%win rate = (100 / 1 + 4) x 4

= 80%

It does not matter what the price does after you exit. All you will see there is the results of something called 'confirmation bias'. But if you must.....

4 point stop loss, 3 point target = 57% win rate WITH NO PROFIT. So of course, many of your 80% winners will go on to make 3 points.

you have no edge - your entry is random, your results are down to basic laws of probability.
Click to expand...

Thanks to both. I'll take your advice into heart and reorganise.
 
Last edited:
pedro01 said:
Re-read what I said. Use the formula. If you get out at 1 point with a 4 point stop loss, then of course you will expect:

%win rate = (100 / profit ticks + stop loss ticks) x stop loss ticks.

%win rate = (100 / 1 + 4) x 4

= 80%
Click to expand...

Are you sure you understand what win rate is? Do you know how to do algebra (don't even talk about higher math)? :LOL:

Don't try to scare newbies by throwing out those **** formula
 
cp - interesting that you try to attack the post but totally fail to provide anything substantive in your attack.

Consider the E-mini. Let's say you enter the market randomly with a 3 point stop loss and a 3 point target. Over time, your win rate will be 50%. You will lose through slippage & fees.

Now - if you make your stop loss smaller, you win rate will go down but you will roughly lose the same amount through slippage & fees.

If you make your stop loss larger, your win rate will improve but you will again roughly lose the same amount through slippage & fees.

So - you need to set a 'base' win rate. If stop loss and target are equal, your base win rate is 50%. That is the amount you would make if you entered the market randomly with that specific stop loss & target ratio. If you do not exceed a win rate 50% with a 1:1 ratio in the system you use, you will NOT make any money because your entry is no better than a random one.

Playing with stop loss & target or 'risk:reward' ratio is nonsense.

Newbies absolutely need to understand this or they will spend endless hours playing with ratios. What is important is that you are exceeding the expected win rate that a random system would achieve.
 
pedro01 said:
cp - interesting that you try to attack the post but totally fail to provide anything substantive in your attack.

Consider the E-mini. Let's say you enter the market randomly with a 3 point stop loss and a 3 point target. Over time, your win rate will be 50%. You will lose through slippage & fees.

Now - if you make your stop loss smaller, you win rate will go down but you will roughly lose the same amount through slippage & fees.

If you make your stop loss larger, your win rate will improve but you will again roughly lose the same amount through slippage & fees.

So - you need to set a 'base' win rate. If stop loss and target are equal, your base win rate is 50%. That is the amount you would make if you entered the market randomly with that specific stop loss & target ratio. If you do not exceed a win rate 50% with a 1:1 ratio in the system you use, you will NOT make any money because your entry is no better than a random one.

Playing with stop loss & target or 'risk:reward' ratio is nonsense.

Newbies absolutely need to understand this or they will spend endless hours playing with ratios. What is important is that you are exceeding the expected win rate that a random system would achieve.
Click to expand...

OK, "Mr. Know It All", any serious or seasonal traders MUST know what a WINNING RATE (or RATIO) is, and what a RISK/REWARD RATIO is. Your definition and formula that "links" win rate & risk/reward ratio is lame at best, st***d at worse.

win rate, officially called win/lost ratio, is nothing simpler than a ratio between wining trades vs losing trades over a period of time.

win/lost raion = # winning trades / # losing trades

REGARDLESS of how much money won or lost per trade​

Risk/Reward Ratio = expected risk / expected reward on ONE TRADE​

Win Rate & Risk/Reward Ratio are 2 DIFFERENT variables. The former for a number of trades (let say, 100 trades) over a period of time. The latter is PER TRADE.

If this concept is hard to swallowed, then I'd truely doubt your (boasting) trading experiences and skills

Other readers, if you are new to trading and would like to learn more the basic terms and terminologies, these links would help you much more than listening to the so called "experts" here:

Win/Loss Ratio

Risk/Reward Ratio
 
A classic example of another "ledgendary member" without the faintest clue. I rest my case
 
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