How does moving to break even affect the RR

[SanMiguel]

A very common trading money management process seems to be to take off half of your profit after 10-20 pips and then let the rest run to target.
Moving the stop to break even changes the risk but can we quantify it because it also makes it more likely that your trade will be stopped out at break even.
For example, a trade targeting 20 pips and stop loss 20 pips, this is 1:1.
Now, if you were to take the opposing money management method, you would take off half at 10 pips and move to break even (this is the same as taking a 5pip profit and changing the RR to 0:1 (zero risk for 10pips remaining ie half of 20pips).
However, when you do this, you have changed the overall risk structure, you only gained 15 pips overall yet you were risking 20 originally - this can't be expected to work in the long term can it?

Trade strategy / win ratio and the move to break even changes things a bit but it's difficult to quantify.

You could also, take half off at 10 pips, and move the stop up by 10 pips...

 

[William Waller]

I wouldn't worry about R:R if I were you. All the conventional wisdom about "you must have a minimum R:R of 2:1 etc" is nonsense in my opinion. What matters is expectancy. An R:R ratio tells you nothing on its own.

It is nearly the same for win rate, although I can understand that there is a valid psychological case for a high win rate.

The other thing I don't understand is taking X off after X pips. The market does not know or care where you came in and how many pips you're up. Manage your trade logically, not according to random factors like being so many pips ahead.

On a related point, this goes back to R:R. Some trades have a very high chance of "working" (depending on your definition). If you enter such a trade with a 0.5 R:R, what is the problem? Again, targets should (in my opinion) be determined by a logical examination of the chart, not by an arbitrary factor such as the trader's desired R:R. The market neither knows nor cares how much you want to make from each trade.

Sorry to go off at a bit of a tangent, but in all honestly I think it's a waste of time worrying about things like that. Back and forward test your system - if it works don't worry about whether you're getting 1:1, 1:0.5 or whatever.

 

[William Waller]

Should add in terms of risk, moving to BE, taking some off etc does not affect your risk.Your risk is what you stand to lose at the outset.

Trade management is a different thing entirely.

All ramblings just my opinion.

 

[SanMiguel]

I wouldn't worry about R:R if I were you. All the conventional wisdom about "you must have a minimum R:R of 2:1 etc" is nonsense in my opinion. What matters is expectancy. An R:R ratio tells you nothing on its own.

It is nearly the same for win rate, although I can understand that there is a valid psychological case for a high win rate.

The other thing I don't understand is taking X off after X pips. The market does not know or care where you came in and how many pips you're up. Manage your trade logically, not according to random factors like being so many pips ahead.

On a related point, this goes back to R:R. Some trades have a very high chance of "working" (depending on your definition). If you enter such a trade with a 0.5 R:R, what is the problem? Again, targets should (in my opinion) be determined by a logical examination of the chart, not by an arbitrary factor such as the trader's desired R:R. The market neither knows nor cares how much you want to make from each trade.

Sorry to go off at a bit of a tangent, but in all honestly I think it's a waste of time worrying about things like that. Back and forward test your system - if it works don't worry about whether you're getting 1:1, 1:0.5 or whatever.

Difficult to do on "darksiding" trading as there's no specific system, it;s all about price action. You could legitimately measure it on past performance, ie win ratio and amount won/lost.

Should add in terms of risk, moving to BE, taking some off etc does not affect your risk.Your risk is what you stand to lose at the outset.

Trade management is a different thing entirely.

All ramblings just my opinion.

Yes, but changing the stop loss and taking partial profit changes the profile along the way.

 

[Lord Flasheart]

It really depends what type of system you have and targets etc.
I generally worry more about what I lose than i win. It is so important to accept loses ,walk away and look for another op,even if it is in the same market going the other way. I often take off after a while if Im ahead in the trade,but I never do it according to r/r rules.I try to trade what i see.

 

[William Waller]

Difficult to do on "darksiding" trading as there's no specific system, it;s all about price action. You could legitimately measure it on past performance, ie win ratio and amount won/lost.



Yes, but changing the stop loss and taking partial profit changes the profile along the way.

What is "darksiding"?

I trade price action - it's no different. In fact, I would say that your past results give a more reliable indication when using a discretionary method. Results from "systems" tend to change over time, something that should surprise nobody.

Absolutely, it changes it along the way. But if you are determining your R:R (again, just my opinion) you should be measure returns against initial risk - after all, that is what you stand to lose. There is no way of knowing at outset whether you will get to employ you risk reduction method.

 

[SanMiguel]

Absolutely, it changes it along the way. But if you are determining your R:R (again, just my opinion) you should be measure returns against initial risk - after all, that is what you stand to lose. There is no way of knowing at outset whether you will get to employ you risk reduction method.

You stand to lose it but if the system is based on support and resistance bounces then each time you take a trade, you would in theory get a bounce and not stand to lose the initial risk, so you then move your stop up changing the profile.
Hard to qauntify, I guess I should look back over 6 months of trades maybe and compare win ratio vs profit/loss. You'd have to have pretty detailed stats to take account of all the different signals that you might get when trading price action.

 

[LazyManForex]

I tested this extensively, including lots of variants of that and could never find anything to outperform an all in, all out approach.

I think it serves some psychological value for manual traders. But from a system trading perspective, I could never find an advantage financially.

There is an advantage to multiple targeting however. That would be if you take the same strategy and find multiple stop Target values that work, let's say three different values for example. Then split your trade into three parts. Ie 3 micros per trade instead of a mini. Then put a third of each stake into each different stop target value. There is significant value to that approach.

-The laziest man at LazyManForex-

 

[Chartsy]

obviously; you need to get the right balance between positive expectancy and the R:R

i could make arbitrary risk and target right now: ill buy eurusd with a 5 pip stop and 500 pip target= 500:1, but the chance of this happening could be 0.000001%
i could get a 99% win rate system, but wih crap R:R it's all useless

 

[SanMiguel]

I tested this extensively, including lots of variants of that and could never find anything to outperform an all in, all out approach.

I think it serves some psychological value for manual traders. But from a system trading perspective, I could never find an advantage financially.

That's the strange thing though, you hear a lot of professionals saying that is the way to go. I don't know if it's a hang back to the old style of open outcry trading but you would have thought that a lot of these guys would have considered RR at some point so if it works for them then something else in the process is giving the overall trade a profitable play out.

There is an advantage to multiple targeting however. That would be if you take the same strategy and find multiple stop Target values that work, let's say three different values for example. Then split your trade into three parts. Ie 3 micros per trade instead of a mini. Then put a third of each stake into each different stop target value. There is significant value to that approach.

-The laziest man at LazyManForex-

Yes and no, as long as the entry point is the same for all 3 micros otherwise with staggered entries you run the risk of only 1 micro being hit in a profitable and all 3 entries being hit in a non profitable trade that goes on to hit your SL.
It's no different than exiting 1.3rds of the trade at predefined TP areas.

 

[Splitlink]

I tested this extensively, including lots of variants of that and could never find anything to outperform an all in, all out approach.

I think it serves some psychological value for manual traders. But from a system trading perspective, I could never find an advantage financially.

There is an advantage to multiple targeting however. That would be if you take the same strategy and find multiple stop Target values that work, let's say three different values for example. Then split your trade into three parts. Ie 3 micros per trade instead of a mini. Then put a third of each stake into each different stop target value. There is significant value to that approach.

-The laziest man at LazyManForex-

Me, neither, but that may be because of my mental attitude. We are all different but I am a person who trades mornings, except in August. If I am in profit at 1330 and take half and let half run, as sure as little apples the running half is stopped out when I get home. So it would have been more profitable for me to close the lot at 1330.

 

[LazyManForex]

I was just on the phone with a friend of mine, and I was reminded that larger professional traders historically scale in and out only because they too come from a stock/futures background where you can't go all in.

Liquidity in FOREX isn't as deep as people make it out to be, but in futures it's definitely not nearly as deep. So one friend for example trades a 40 million dollar forex account. When he wants in on a position, he is forced to do it by scaling in. Then when he begins his exit, he works his way out of the position.

But it's not for trading reasons or statistical advantages, just a limitation on liquidity and not hitting the market with one large order (and for some reason, those guys are really, really, really paranoid and don't want people to know what they are doing) : - )

-The laziest man at LazyManForex-

 

[bangkoker]

Interesting thread, something I have been wondering a lot to

 

[Splitlink]

I was just on the phone with a friend of mine, and I was reminded that larger professional traders historically scale in and out only because they too come from a stock/futures background where you can't go all in.

iquidity in FOREX isn't as deep as people make it out to be, but in futures it's definitely not nearly as deep. So one friend for example trades a 40 million dollar forex account. When he wants in on a position, he is forced to do it by scaling in. Then when he begins his exit, he works his way out of the position."

But it's not for trading reasons or statistical advantages, just a limitation on liquidity and not hitting the market with one large order (and for some reason, those guys are really, really, really paranoid and don't want people to know what they are doing) : - )

-The laziest man at LazyManForex-

Of course! I'd never thought of that.

 

[tomorton]

Good discussion. I personally go for the single entry + single exit approach. The percentage chance of success of a trade should be known on entry from backtesting. The target level for such an entry should also be known.

e.g. I buy at 5000 and have proved through backtesting that there is a 51% of price hitting 5100 and a 49% chance of price hitting 4900. Over 100 typical trades this gives me a profit. So, if price reaches 5050, there is still a 51% chance of it con tinuing to 5100. If, at 5050, I thought there was now a 51% chance of price hitting 5000 again rather than 5100, then my target was wrong from the outset and I should be fully exiting at 5050. Or, even better, exit at 5050 and reverse into a short, with target 5000.

As was suggested above, I believe the move stop to b/e advice is a relice from a simpler age: like 'Sell in May and go away'.

 

[SanMiguel]

Good discussion. I personally go for the single entry + single exit approach. The percentage chance of success of a trade should be known on entry from backtesting. The target level for such an entry should also be known.

e.g. I buy at 5000 and have proved through backtesting that there is a 51% of price hitting 5100 and a 49% chance of price hitting 4900. Over 100 typical trades this gives me a profit. So, if price reaches 5050, there is still a 51% chance of it con tinuing to 5100. If, at 5050, I thought there was now a 51% chance of price hitting 5000 again rather than 5100, then my target was wrong from the outset and I should be fully exiting at 5050. Or, even better, exit at 5050 and reverse into a short, with target 5000.

As was suggested above, I believe the move stop to b/e advice is a relice from a simpler age: like 'Sell in May and go away'.

It may be a relic but it's also difficult to quantify the RR. Yes, if you start with
Entry 5000
SL 4980
Target 5100
then your initial RR is 1:5
but the whole half off after say 20 points and move to break even, at that point you have some profit and also have a free trade but you don't know if your TP will be hit. With the remainder you can let it run so the eventual RR becomes much greater.
However, you'd have to have stats on how many times moving the SL choked the trade.

At least with your system above you know the RR at all times.

I agree that big money can't enter the market all in one go but they mainly do that for swing trades so they don't crash the market or boost it too much plus they have a little of a game to play as others might be looking for their trading ID in the Level 2 quotes.

 

[Splitlink]

I think that Tom has it, but do not agree with 1:1 or any other ratio. As far as Footsie is concerned a 100 point stop loss and close on initiative is as good a way as any. I have tried all ways, so far as stops are concerned , and do not believe that close ones are any good. The closer they are, the more likely they are to get triggered and, in general, the more trades are done, all of which requires a lot of monitor gawking time. My present SL, the way I am trading at present, is 100 points. That way I close anything from a few hours to a few days. I find that this works for Euro/GBP, as well, but cable and other instruments need a bigger SL.

Anyone who reads my posts will know that I have always been a believer in close stops, so 100 points is a big deal for me, but, I really do have more time to spend on other things.

 

[tomorton]

It may be a relic but it's also difficult to quantify the RR. Yes, if you start with
Entry 5000
SL 4980
Target 5100
then your initial RR is 1:5
but the whole half off after say 20 points and move to break even, at that point you have some profit and also have a free trade but you don't know if your TP will be hit. With the remainder you can let it run so the eventual RR becomes much greater.
However, you'd have to have stats on how many times moving the SL choked the trade.

At least with your system above you know the RR at all times.

I agree that big money can't enter the market all in one go but they mainly do that for swing trades so they don't crash the market or boost it too much plus they have a little of a game to play as others might be looking for their trading ID in the Level 2 quotes.

The problem with a very asymmetrical r:r is that the smaller you make the risk side in points, the more likely it is to be taken out by meaningless volatility. But your r:r with the slicing method you describe is not 1:5 anyway, it's rather less.

I find it exceedingly difficult to backtest a system with complex exit rules. And for me if you can't prove the exits make money, the best system makes no sense.

TA should drive exits. Don't forget that where you would take off half the position, at 5020, other people not in the trade might view the TA as saying they should go long, so you have thrown away a fine opportunity as they drive prices even higher. Whereas if the TA says price will stall or fall, you shouldn't just close half, take it all out and have that capital ready for another postion.

 

[LazyManForex]

The way I analyzed these before was to treat them as different strategies.

ie.
Strat1: Trigger/Stop/Target at original
Strat2: Trigger/Stop/Target at 20/Move Stop to BE at 20

If Strat2 has merit by itself, then it's worth doing. I don't analyze that anymore because I could never find an advantage. But no matter what, Strat2 must prove itself, by itself, to be worth blending with your strategies (of course with identical entries).

In my current stage of learning (the last 7 or so years) I have been trading multiple strategies. So it's been important that I avoid correlation between strategies. If two systems have the same risk profile (losing at the same time), why not double up on a single. So keep that in mind when you diversify your exits, consider that both stops get hit at the same time.

Therefore, Strat2 not only needs to be okay, but should exceed Strat1 in performance, in exchange for doubling your risk at the entry point.

Then, if Strat2 exceeds Strat1, why not dump Strat1 altogether and trade Strat2 which is better, considering they are correlated anyway.

It was that logic flow that caused me to abandon some time ago the faded exits, scaling in, moving stops etc. (From a system trader's perspective only).

If I am wrong, I would love to hear input. Anything that improves overall system performance is VERY welcome : - )

-The Lazy One at LazyManForex-

 

[trader_dante]

Moving to break even is the best way to make a profitable strategy, unprofitable.

In my opinion.