Risk Reward Myth

[kimo'sabby]

As a chart trader when i think of Risk:Reward i think of inherent volatility and realistic trade parameters to fit. I never really think about mathematical probabilities as such, maybe i should, seems to be all the rage.

 

[theroguetrader]

Indeed, a beginner's mistake is to assume there is a 50/50 chance of success and is predicated on the trade situation being simply random.
They also assume that there is a 50/50 chance of a 1:2 or 1:3 etc risk/reward being hit.
That is absurd, but even seasoned traders have it rooted in their minds.
Richard

statistically speaking, trading the market with a 1:1 risk reward ratio and no strategy or trading edge has a 50% chance of success (minus fees) over a long series of trades. ie - most traders should approximately breakeven over the long run because trading with a (truly) random entry and a 1:1 risk reward is the same as a random coin toss -

the MAIN THING that definitely prevents MOST PEOPLE from making money in the market is OVER TRADING .. !! traders who just jump in and out of the market on " emotion and greed ", will not only suffer many more losing trades, but they will also rack up a lot more fees via spreads and (or) commissions over the course of a year than traders who stick to the higher time frames and understand the value of self discipline and having PATIENCE. Trading lower time frames causes many traders to over-trade because they end up thinking they see many more trading signals worth trading, when in reality there is just a lot more “junk” signals and “noise” on lower time frames -

Human beings have a tendency to see patterns that don’t really mean anything. This is especially true in trading; if you stare at a chart long enough you can make up all kinds of things that “should” happen based on what you “ see ” !! - you have to develop PATIENCE so that you aren’t guilty of “manifesting” irrelevant patters in the market - which traders do ALL THE TIME !!

 

[theroguetrader]

As a chart trader when i think of Risk:Reward i think of inherent volatility and realistic trade parameters to fit. I never really think about mathematical probabilities as such, maybe i should, seems to be all the rage.

RISK/REWARD IS " THE " most important thing in trading !!

if you take your profit at R1 - you might as well toss a coin -
if you take your profit ar R2/R3 - you could be(WRONG) on half your trades and still be in PROFIT - OVER TIME !!

 

[Jason101]

Or you could take 3 parts profit at R1, 1 part at R2 and the last 1 part at R3.

 

[theroguetrader]

Or you could take 3 parts profit at R1, 1 part at R2 and the last 1 part at R3.

or open 3 lots, enter at 50% of the pin (if it retraces there), take 2 lots off at the break of the low of the pin (and vice versa) and run the other lot -

 

[kimo'sabby]

RISK/REWARD IS " THE " most important thing in trading !!

if you take your profit at R1 - you might as well toss a coin -
if you take your profit ar R2/R3 - you could be(WRONG) on half your trades and still be in PROFIT - OVER TIME !!

Mmmm, it's arguable. Gonna relax now, i'll get back t'ya tommoz.

 

[theroguetrader]

Mmmm, it's arguable. Gonna relax now, i'll get back t'ya tommoz.

whats argueable ? - R1 is breakeven anyway - so all the pressures off !!
much easier to chill then for sure anyway

 

[TheBramble]

Well done to hoodoo for responding to a 6 month old thread, but yes, the whole R:R is bogus.

The likelihood that anyone can accurately calculate their likely reward is patently absurd. Your risk is the only thing over which you have any control.

You get to choose when and if and where to enter. And you get to chose where and when you exit. That’s it.

You make a 1:1 well done. You make a 1:3 really well done. You make a 1:0.01 – it’s not a loss. You make a 1:-0.01. Well done. It’s not a major loss.

 

[TheBramble]

Apologies to all the Gannites and Ellioticians who routinely hit tops and bottoms at pre-ordained levels to the pip and times to the second. Wealthy as Croesus, every man jack of them.

 

[DashRiprock]

another reason why R:R is bogus is because getting out of a position just because you are losing money is not always good. It by defenition puts you in the "weak hand" group

I mean if the reasons for your long trade are still good, and its gone against you, buy more!

 

[theroguetrader]

Well done to hoodoo for responding to a 6 month old thread, but yes, the whole R:R is bogus.

The likelihood that anyone can accurately calculate their likely reward is patently absurd. Your risk is the only thing over which you have any control.

You get to choose when and if and where to enter. And you get to chose where and when you exit. That’s it.

You make a 1:1 well done. You make a 1:3 really well done. You make a 1:0.01 – it’s not a loss. You make a 1:-0.01. Well done. It’s not a major loss.

"absurd "..?? - well that depends on how good your edge is and whether your reading the price action correctly - instead of a " random " entry with no defineable edge .. !!

R4/R5 gets hit occasionally too !!

 

[DashRiprock]

these last few threads on probability have really been an eye opener for me here.

seems to be that alot of people just see the markets as a finite sample space, and if you can find some set of circumstances that yield a positive expectancy you are home and dry.

:-?

 

[Masquerade]

I mean if the reasons for your long trade are still good, and its gone against you, buy more!

But losers average, didn't you hear?

 

[TheBramble]

"absurd "..?? - well that depends on how good you edge is and whether your reading the price action correctly - instead of a " random " entry with no defineable edge .. !!

R4/R5 gets hit occasionally too !!

WTF has that got to do with what I said?

Quote someone else in future if you want a 'reason' for your random responses. Here's a tip: pick one that is remotely connected with what you want to get off your chest.

 

[DashRiprock]

But losers average, didn't you hear?

Im not averaging a loser, I'm scaling into a winner

 

[theroguetrader]

WTF has that got to do with what I said?

Quote someone else in future if you want a 'reason' for your random responses. Here's a tip: pick one that is remotely connected with what you want to get off your chest.

whose quoting who ? - i said something and you just shot it down by saying it was " plainly absurd " -

well your just " plainly wrong " - and that is an " ABSOLUTE TRUTH " .... !!

 

[TheBramble]

I wasn’t quoting anyone. I was making an original observation.

Go away muppet.

 

[theroguetrader]

I wasn’t quoting anyone. I was making an original observation.

Go away muppet.

well quoting an original observation, that ANYONE with half a brain cell plainly knows is incorrect, saying its FACT and even worse " agreeing with it " - makes you more of a muppet than me then doesnt it ..??

sad thing is - you actually believe it !! - ur not related to george osborne are ya ..??

 

[hoodoo man]

Okay, I'll bite.

statistically speaking, trading the market with a 1:1 risk reward ratio and no strategy or trading edge has a 50% chance of success

You talk absolute nonsense. Breaking even is not success.

(minus fees) over a long series of trades. ie - most traders should approximately breakeven over the long run because trading with a (truly) random entry and a 1:1 risk reward is the same as a random coin toss -

Now you get to the point. Except we can't be successful trading in fantasy land where spreads, commission, slippage, fast markets, order entry errors, and vig do not exist. These costs exist, so hypothetical scenarios which don't include them are useless in the real world. (and a good indication that the person talking such a hypothetical is either deliberately blowing smoke or doesn't have a clue)

the MAIN THING that definitely prevents MOST PEOPLE from making money in the market is OVER TRADING .. !! traders who just jump in and out of the market on " emotion and greed ", will not only suffer many more losing trades, but they will also rack up a lot more fees via spreads and (or) commissions over the course of a year than traders who stick to the higher time frames and understand the value of self discipline and having PATIENCE. Trading lower time frames causes many traders to over-trade because they end up thinking they see many more trading signals worth trading, when in reality there is just a lot more “junk” signals and “noise” on lower time frames -

What prevents most people from making money in the market is that they do not know where to trade and why. Whether they trade frequently or infrequently simply dictates how much vig they pay and is a factor in how quickly they blow up. "Junk signals" and "noise" - what nonsense you talk. A trader making an error or getting it wrong is not the fault of the market, noise, junk, or anything else.

Human beings have a tendency to see patterns that don’t really mean anything.

This is a correct statement.

As for your chart, let me draw you another one. Easy to say you bought the pin bar in hindsight. How do you know whether to take profit at 1R, 2R, or 3R?

Isn't a double top a valid sell signal? So when Joe Wanabee sells short there, he is wrong no matter what. Whether he sets his fantasy target to 1,2,3 or 5R doesn't matter - the market is never going there without stopping him out first. This is why made up R:R is irrelevant.


What is wrong with this site and trading sites in general is that every idiot spouts off like a know it all. You set yourself up to be flamed by going around telling everyone what THE MOST IMPORTANT THING IN TRADING is according to your own limited point of view. The real shame is that some people choose to believe this without taking the effort to think for themselves. Totally useless and a waste of time.

RISK/REWARD IS " THE " most important thing in trading !!

if you take your profit at R1 - you might as well toss a coin -
if you take your profit ar R2/R3 - you could be(WRONG) on half your trades and still be in PROFIT - OVER TIME !!

Anyone who goes around preaching this as though it is gospel is suspected of having a room temperature IQ. I've made this point five or six times in different ways in as many days on this site. It seems as though people are determined to be dumb losers who don't think, don't improve, and ultimately don't profit in the markets. Their choice.

I'll leave the incurably deluded to their risk:reward ratios. Whatever makes you happy.

 

[hoodoo man]

Apologies to all the Gannites and Ellioticians who routinely hit tops and bottoms at pre-ordained levels to the pip and times to the second. Wealthy as Croesus, every man jack of them.

No need to apologise to the special class who can do this.
Maybe take a look at - http://web.archive.org/web/20050707013433/http://marketmonk.blogs.com/pmtc/
$5k to over $8 million in six weeks trading the emini with Gann / price and time structure.

There is a chap who used to post here by the name of fudgestain who completely kills the futures markets using price and time. There are many others. Evidently you are not successful as you do not believe success is possible.

If it was possible, why haven't you turned yourself into Croesus?