Risk Reward Myth

[DashRiprock]

what Im saying is that a good trade isnt always one thats gone in your favour, and likewise a bad trade isn't one thats gone against you.

for a trade, you have a hypothesis. and you stick with the trade until your hypothesis is proven right and exhausted or wrong/uncertain.

a hypothesis of "risk X for reward Y" is a pretty naive definition of how markets work imo

 

[Atilla]

what Im saying is that a good trade isnt always one thats gone in your favour, and likewise a bad trade isn't one thats gone against you.

for a trade, you have a hypothesis. and you stick with the trade until your hypothesis is proven right and exhausted or wrong/uncertain.

a hypothesis of "risk X for reward Y" is a pretty naive definition of how markets work imo

Fair dos.

Straight question - have you analysed your passed trades?

What losses and trades do your have as your ratio?

This is like budget analysis.

1. What budget do you have now?
2. What have you budgeted for next year?
3. What was your actual budget this year?
4. What was your estimated budget previous year?
5. What is your budget variance and how can you explain difference? Why what how etc.

What was your estimated / actual X:Y ratios?

How do you account for variance?

It would be interesting exercise to carry out on how your hypothesis pans out.

I expect this R:R X:Y ratios etc would be different with every trader based on passed losses and gains.

One could call it a traders pscycho factor instead of R:R appetite.

What ever rocks your boat I guess.

 

[DashRiprock]

yes of corse i look at my bloody trades :-? !!

but wat on earth do you expect to learn from me?

estimated X:Y ??

wat?

look take whats there.

 

[Atilla]

yes of corse i look at my bloody trades :-? !!

but wat on earth do you expect to learn from me?

estimated X:Y ??

wat?

look take whats there.

Trader psycho factor X:Y!!!

So every trade you enter is based on X:Y off the charts?
You set your Stops and Limits on chart locations - or what ever your trading mechanism is.

Not some arbitary R:R ratio.

 

[DashRiprock]

nononononono

I have hard disaster stop because leverage ans risk management

other than that I am in when it looks good and out when it dont

 

[Atilla]

nononononono

I have hard disaster stop because leverage ans risk management

other than that I am in when it looks good and out when it dont

I'm not asking you to disclose any personal information but if you look at your past trades of what you make on a trade compared to your hard stop will give you the trader pscyho factor.

Just an interesting factor - mean average and then you can baseline your trades in terms of high probability of when you are on base and when you are below or exceeding expectations of what ever is your look good returns are etc.

See what I'm getting at... Perhaps just another mean stat...

 

[DionysusToast]

I would agree R:R is nonsense.

Set and forget is a not the way I would to play things either. When I enter, I of course have a target in mind and I have an area below which I know I will puke.

I don't ever trade breakouts and so I am usually buying into selling or vice versa. A such, my stop is generally much closer than my target but I never bother with calculating the r:r. I see the trade, it looks OK, I get in.

Once in, I let the action define the exit. Sometimes that is before my target, sometimes at my target and sometimes after. As such, to me that original R:R means very little as it's not where I always exit on the upside or downside.

On the topic of scratching trades, I do it quite often and most of the time it saves me money. Trouble is, I have a mental block on one aspect of scratching. If I go long and price immediately goes my way BUT then I see selling that convinces me to scratch, I have no issue with it. I have noticed though that when a trade goes against me immediately and my gut tells me it's a loser (which is not the case on all trades that go against me), I find that price will usually come back close to or above my entry point and spend a little time there giving me ample opportunity to get out. I have a hard time scratching these trades for some reason.

Anyway - r:r I guess presumes a statisical, objective, rules based approach with passive trade management.

I ain't seen anyone making money that way.

 

[kimo'sabby]

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

No such thing as BE matey, you always gotta risk to enter the market. BE is like doing a job and not getting paid to do it, u still on a loser.

As for r:r, it's a goal an objective, but that's about it. R:R is a variable, it's only a constant when averaged out over multiple past trades.

 

[the hare]

I would agree R:R is nonsense.

Which is probably why its discussed so often on trading forums !

 

[DionysusToast]

You know - we could make a case for R:R being dangerous.

This is now:

Risk = 9 ticks
Reward = 36 ticks

That's 1:4.

Now - what if this goes up 30 ticks then starts to falter - do I let it come back down to -9 ticks before I do anything about it ?

OR

Do I start tightening up a trailing stop behind the trade as it gets to say +30 ticks?

If I do the latter, then my original r:r is no longer valid.

So - set & forget?

 

[theroguetrader]

No such thing as BE matey, you always gotta risk to enter the market. BE is like doing a job and not getting paid to do it, u still on a loser.

As for r:r, it's a goal an objective, but that's about it. R:R is a variable, it's only a constant when averaged out over multiple past trades.

" no such thing as break even " ...!! -

when a prices passes your entry point and you move the stop the same distance as you risked - there is no risk !! - breakeven !!
people get in trouble when they stubbornly hold onto a trade REFUSING TO BELIEVE their hunch,idea, system or simply their timing, is wrong - (EGO)- its that simple !!

" As for r:r, it's a goal an objective, but that's about it " - !!

if you look at the mathematical reasoning behind R/R"s - youll understand its not a " goal " and youll be looking at " CONSISTENT PROFITABILITY ".. !!

if the risk is £200 and the reward is £400 - the R/R ratio is - 200:400 - (1:2)
if the risk is £500 and the reward is £1500 - the R/R ratio is - 500:1500 - (1:3)
if the risk is £1000 and the reward is £500 - the R/R ratio is - 1000:500 - (2:1)

if you enter a trade and the R/R ratio is 1/1 - the risk outweighs the reward, so its not worth taking in the first place !!
you might have to wait longer & BE PATIENT for a set up to appear to enable you to take the trade with a 1:3 (or higher) - but the reward will be worth it .. !!

markets move between S/R - thats all they do !! If a R/R ratio of 1:2 (at least) isnt possible, i wouldnt bother taking the trade and id wait for a better set up !!

or i could take off 90% of my size off at R1 and run the rest !! - im not trying to pick tops & bottoms (like most people - because they have this NEED to be be proven correct all the time - (GREED) - i just take my profit out the sweet spot and be done with it .. !!

" GET IN - GET OUT - GO PLAY " ..... !!

 

[kimo'sabby]

" no such thing as break even " ...!! -

when a prices passes your entry point and you move the stop the same distance as you risked - there is no risk !! - breakeven !!


But to make the trade, to enter the market you have to risk something. No trade is ever free.

 

[Atilla]

You know - we could make a case for R:R being dangerous.

This is now:

Risk = 9 ticks
Reward = 36 ticks

That's 1:4.

Now - what if this goes up 30 ticks then starts to falter - do I let it come back down to -9 ticks before I do anything about it ?

OR

Do I start tightening up a trailing stop behind the trade as it gets to say +30 ticks?

If I do the latter, then my original r:r is no longer valid.

So - set & forget?

I'm going to create a demo account and try these out. We'll see the outcome and I'll post here...


I will set Limit entry orders for each currency to trigger at my entry choice with each one having a R:R of 1:2

I will only place orders with R:R stop:limits of 1:2

I will not touch those trades once placed and then see what the outcome is?

Time period being one week.

 

[theroguetrader]

" no such thing as break even " ...!! -

when a prices passes your entry point and you move the stop the same distance as you risked - there is no risk !! - breakeven !!


But to make the trade, to enter the market you have to risk something. No trade is ever free.

if the trade in question cant achieve R1 - it shouldnt be taken in the first place - because the risk will outweigh the reward !!

 

[TheBramble]

if the trade in question cant achieve R1 - it shouldnt be taken in the first place - because the risk will outweigh the reward !!

I really am losing the will to live.

How precisely do you go about assessing whether 'the trade can achieve R1' (or any other target/reward level)? You can't.

That's the whole point.

If it's worth going in, you go in. You stay in all the while it's worth staying in. When it's no longer worth staying in, you get out.

What's your reward. That's nice. How does it relate to your risk? Who cares? Next trade.

Quite apart from there being a morbid fear amongst newbies/non-traders of taking a reward less than the risk there seems to be a lack of understanding at the most basic level about what trading is all about.

 

[Atilla]

I really am losing the will to live.

How precisely do you go about assessing whether 'the trade can achieve R1' (or any other target/reward level)? You can't.

That's the whole point.

If it's worth going in, you go in. You stay in all the while it's worth staying in. When it's no longer worth staying in, you get out.

What's your reward. That's nice. How does it relate to your risk? Who cares? Next trade.

Quite apart from there being a morbid fear amongst newbies/non-traders of taking a reward less than the risk.

What happens if you are not watching your screen day in day out?

 

[TheBramble]

What happens if you are not watching your screen day in day out?

Uh? Mine tend to stay put.

 

[Splitlink]

I actually think risk:reward is a load of b0ll0cks myself, as it implies that the market actually cares about what you're doing. Furthermore, it implies that the only strategies which can make money are those with a ratio of 2:1 or 3:1.

You set the risk, the market gives you the reward.

However I think there's a little grain of truth behind the idea of 2 or 3:1, as it clearly implies small losing trades and big winning trades.

One of the main cognitive biases leading to losing money is cutting winners too soon and running losses for far too long. If you were to stick with 2:1, that's not going to happen.

Having said all that, I trade a trend model where I don't have any profit targets.. I've been unable to find a robust mechanical system which uses profit targets, and indeed when I did trade this way, I frequently came across the dilemma whereby (e.g.) the profit target was 100 pips, and the market would get to +97 pips before reversing. Profit targeting doesn't really tell you what to do in these circumstances.

It is true, you set the risk or, at least, you should do because it is the only part of the trade that you can control. What you take out of the market is something else, entirely. If I don't like the trade as much as I did on entry I am pleased, sometimes, to break even on it. R:R = 1, or 2, or 3 is all pie in the sky, as far as I am concerned. Most of it is derived from pivots, fibs and other such indicators and are a figment of a mind that believes that the market is a predictable animal. Nothing could be farther from the truth. The market will turn on a dime, but where that dime is is anyone's guess.

 

[the hare]

What happens if you are not watching your screen day in day out?

Where I live, they get stolen by pixies and elves

On a serious note, If you cant watch em, dont try trading those timeframe.

 

[theroguetrader]

I really am losing the will to live.

How precisely do you go about assessing whether 'the trade can achieve R1' (or any other target/reward level)? You can't.

That's the whole point.

If it's worth going in, you go in. You stay in all the while it's worth staying in. When it's no longer worth staying in, you get out.

What's your reward. That's nice. How does it relate to your risk? Who cares? Next trade.

Quite apart from there being a morbid fear amongst newbies/non-traders of taking a reward less than the risk there seems to be a lack of understanding at the most basic level about what trading is all about.

R1 isnt a level of achievement - if a trade cant get from where your stop is to your entry point, you entered at the wrong place !! - either your price action analysis is wrong or you just " dived in " - and hoped for the best !!
id be patient & wait for a better entry -

the profit target is best measured in " multiples of your risk " - that stops " drifting with no goal and overtrading " !! - its just a metric !! - a guide !!