Risk Reward Myth

[theroguetrader]

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 market can turn on a dime, so can be thought of as un predictable, but whats making them move in the first place are human beliefs - (greed/fear) -
These beliefs are a result of emotions, and human emotion is very predictable when it comes to money -
all markets are fractal in nature - the same signals appear on all charts in all timeframes - always have done always will do !!

 

[Splitlink]

So what you say is "If my stop is at 0, my entry will be at ie.10 and the target will be at 20"

That is a very hopeful way of looking at it and I have the idea that that is why so many lose (you not included here, but we are directing these posts to beginners).They will not close until they reach their target and so, if they get to 75% of the target they will watch the price drift all the way back to the stop, shrug their shoulders and try again. One should, IMO, be more aggressive than that because passive traders will always lose to the market in the end, even when they have their stops in place. In fact, quite often, precisely because they have their stops in place.

 

[TheBramble]

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 !!

You are a bot - in more ways than one.

No human could so respond so totally out of context to the text they are quoting.

You’ve been sent here by Dark Forces to tip me over the edge into the Abyss, haven’t you….

 

[Ambrose Ackroyd]

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.

Ryan Giggs couldn't have put it better himself.

 

[theroguetrader]

You are a bot - in more ways than one.

No human could so respond so totally out of context to the text they are quoting.

You’ve been sent here by Dark Forces to tip me over the edge into the Abyss, haven’t you….

nah, your thinking bout george osborne maybe - by the way whats his wallpaper like ? any good ?

 

[Atilla]

Where I live, they get stolen by pixies and elves

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

Haha very funny guys...

I think we are talking semantics and splitting hairs.

R:R emphasises and identifies an ideal, a strategy, a target to aim for. It is not set in stone.



Ok here are two trades on EURUSD with R:R 100:200 pips set as limit orders one for the upside and one for the downside.

Taken from 15min short time frame so it should hit. I'll only use this account for testing R:R Entry orders. No market orders. Just pure mechanical trading with R:R margins set at trade setup.

 

[TheBramble]

Atilla, are you just randomly setting levels for trading positions?

Well, I guess that's one way to do it...LOL

Your buy trigger is right on the Weekly high and where we’ve already had a few touches over the last few days. It could easily touch that level and come back on you.

Same for your sell at 4610. You’ve got daily support at 4601 AND the round number at 4600 which potentially could slow any downward move within a few pips of your entry.

I don’t currently have a directional bias on this one, and your random (are they random) entry level method is an interesting one, but I’m not sure this is substantially different in approach to tossing a coin. Not that I’d want to disparage that particular method…. But, there’s no market savvy involved, there’s no assessment of current price action and as importantly, especially within the context of this thread, there’s absolutely no technical basis for placing your stoploss and take profit at the levels they’re at.

Which I suppose in a rather ironic way has underlined that concept of R:R being capable of playing any part in assessing pre-trade probabilities is indeed a myth.

 

[Atilla]

Atilla, are you just randomly setting levels for trading positions?

Well, I guess that's one way to do it...LOL

Your buy trigger is right on the Weekly high and where we’ve already had a few touches over the last few days. It could easily touch that level and come back on you.

Same for your sell at 4610. You’ve got daily support at 4601 AND the round number at 4600 which potentially could slow any downward move within a few pips of your entry.

I don’t currently have a directional bias on this one, and your random (are they random) entry level method is an interesting one, but I’m not sure this is substantially different in approach to tossing a coin. Not that I’d want to disparage that particular method…. But, there’s no market savvy involved, there’s no assessment of current price action and as importantly, especially within the context of this thread, there’s absolutely no technical basis for placing your stoploss and take profit at the levels they’re at.

Which I suppose in a rather ironic way has underlined that concept of R:R being capable of playing any part in assessing pre-trade probabilities is indeed a myth.

Agreed Bramble. No interest in direction purely trade testing system with R:R...

I normally like to trade on Entry orders. Fire and forget.

I've looked at BB's on 15mins and set two entry orders with 100:200 pips that's all. One to the upside and one down. I used this system on NFL announcements and on wild days its easy money.

There is madness to the system but also a logical system of BB breakout from a narrow range.

I have had both trades stop out as you rightly mention - but this normally happens if tight Stops are placed on choppy days.


I'm intrigued to test my self after much discussion.


However, as often mentioned - if I visit the console and check to see which fish have bitten the hook I would subsequently adjust Stops or Limits accordingly. These I'll leave untouched just to see R:R in action.

I'll set a few more up this evening when I have more time.


Best regards,

 

[TheBramble]

For some reason this approach is extremely attractive. I think there is something wrong with me. LOL

Look forward to seeing how this pans out, regardless of result, it's intriguing.

 

[Atilla]

For some reason this approach is extremely attractive. I think there is something wrong with me. LOL

Look forward to seeing how this pans out, regardless of result, it's intriguing.

Well within the last half hour I had two glimpses
+32
-79

now it's at +1

I'll write up my BB breakout system if you are interested anyone... Especially for NFP resulsts.

 

[TheBramble]

I'll make a point of coming back here to have a look.

Right now though 'tis almost the 15th hour...

Which means bollox to R:R, I'm off for some much needed R&R and to do my bit in stimulating various economies of the Far East through direct commercial enterprise in the purchasing of services, product and infrastructure.

May Kali watch my back, Ganesh gird my loins and St. Francis keep those friggin dogs off my ass.

Keep the Faith

 

[Splitlink]

Atilla, are you just randomly setting levels for trading positions?

Well, I guess that's one way to do it...LOL

Your buy trigger is right on the Weekly high and where we’ve already had a few touches over the last few days. It could easily touch that level and come back on you.

Same for your sell at 4610. You’ve got daily support at 4601 AND the round number at 4600 which potentially could slow any downward move within a few pips of your entry.

I don’t currently have a directional bias on this one, and your random (are they random) entry level method is an interesting one, but I’m not sure this is substantially different in approach to tossing a coin. Not that I’d want to disparage that particular method…. But, there’s no market savvy involved, there’s no assessment of current price action and as importantly, especially within the context of this thread, there’s absolutely no technical basis for placing your stoploss and take profit at the levels they’re at.

Which I suppose in a rather ironic way has underlined that concept of R:R being capable of playing any part in assessing pre-trade probabilities is indeed a myth.

I must say that your post amused me. To think that no market savvy needs to be involved or anything else.

Atilla is confounding the gurus!

 

[timsk]

Very good point. Where does this canard come from? I see some of the beginners stickies and "first steps" articles contain misleading things like this...

Hi hoodoo man,
Sorry to interupt the thread.

Just to say that I write most of the Stickies and FAQs on the site and, although I try my hardest to get things right and to be balanced, I'm not perfect and I don't doubt there are some mistakes and a few misleading comments here and there. So, please bring them to my attention and I will correct them. To my mind, that's the great benefit of a 'community' website like this, traders with more knowledge and experience than me can help to ensure that the site content is the best it can be. Of course, if you're just expressing an opinion, then the Stickies and FAQs are all open threads and you're more than welcome to post as, indeed, I see you've done here: Essentials Of First Steps

Needless to say, these comments apply to everyone. I welcome any constructive comments on how to make the Stickies and FAQs better / more accurate / factually correct etc, etc. Thanks for you help.
Tim.

 

[Atilla]

I must say that your post amused me. To think that no market savvy needs to be involved or anything else.

Atilla is confounding the gurus!

Hi guys,

What ever you say right now I'd probably check accounts and lock profits or half or amend SL & Limits etc etc...


However, will leave as is purely automated entry limits.

Also if one of these is taken ie I may cancel the opposing trade etc...

Either way we are in profit zone now...

 

[Atilla]

Hi guys,

Here is some brief evidence Risk & Reward works - even without any trade management.

Snap shot for EURUSD shows both short and long trades were executed but the over all greater reward has more than made up for the loss.

With trade management - trailing Stop Losses etc this does work.


I know you are all going to say well it is simply too short a period and I agree. So over the weekend I'll put a few more Entry orders.

Just to let you know in each case;

1. Two entry orders are placed within any particular TF
2. One to the upside of the BBand
3. Another to the downside
4. In each trade R:R is 1:2.

Finally only consideration that is taken is the trade be placed when BBs are as narrow as possible within the TF to allow breakouts to either side.

 

[Atilla]

Wow - what's happened to all the big opinions on this thread?

Three days and 5 entrry orders got hit. Account is in profit. 3 lossers and two winners. I'd expect more losers than winners so on average account is on target.

So where are all the Risk : Reward is nonsense dudes?


I may still get to have egg on my face but I like to enjoy the moment whilst I'm ahead. You've all gone quiet scuppered into your little corners. Any opinions or comments thus far???


Purely mechanical trading with no interference based two trades to each side of a BB breakout: to the upside and downside. Only other condition for entering trade is adhering to 1:2 R:R ratio.

https://www.forexdesk.com/traders/Atilla/accounts/193

 

[DionysusToast]

Atilla

The sample size is way too small to draw any conclusion. This isn't shutting anyone up - just not giving them anything more to say.

Over time, I'd expect this strategy to break even unless you are saying there is something about a BB breakout that has an inherent edge.....

Still - I rather hope you do make money at it. What are you willing to draw down on this strategy in order to give it a good run?

DT

 

[Atilla]

Atilla

The sample size is way too small to draw any conclusion. This isn't shutting anyone up - just not giving them anything more to say.

Over time, I'd expect this strategy to break even unless you are saying there is something about a BB breakout that has an inherent edge.....

Still - I rather hope you do make money at it. What are you willing to draw down on this strategy in order to give it a good run?

DT

Hi DT, yes I agree it is simply too short a time period as well as sample size. Could also be something to do with market location as Bramble pointed out.

Re:BB being an edge - all BB breakout is doing is observing that for any TF picked when they are narrowed - congestion and evaluation of market is taking place. At least that's how I read it. From that point for that Time Frame the market then has one of 3 options.

1. Turn up and continue
2. Reverse and fall
3. Trend sideways.

This is where R:R comes in.

It doesn't matter which direction one takes. As long as the Reward > Risk wrt to stops. This is the key factor.

I would say BB levels are the ignition and RR is the driver for both trades wrt entry and exit.

Re: your question I'm not sure re:drawdown... What would you expect to conclude it is a winning strategy or accept RR is not nonsense? I already accept it and use it in my trading. Must confess though I do not adhere to it rigidly as in this demo.

 

[DionysusToast]

Atilla

Well - it has to be said that from ANY point the system can go up, down or sideways. This is not unique to BBs. The question is - is there a reason to expect one will occur more than others. I'd expect mean reversion to be more normal than a breakout personally. Not that I trade mean reversion.

Anyway, You have 3 for 5 now. Let's say you had the next 10 trades as losers. Would you abandon the system?

If so - would that be because it doesn't work or because you don't have the stones?

DT

 

[Atilla]

Atilla

Well - it has to be said that from ANY point the system can go up, down or sideways. This is not unique to BBs. The question is - is there a reason to expect one will occur more than others. I'd expect mean reversion to be more normal than a breakout personally. Not that I trade mean reversion.

Anyway, You have 3 for 5 now. Let's say you had the next 10 trades as losers. Would you abandon the system?

If so - would that be because it doesn't work or because you don't have the stones?

DT

that made me laugh.

I would say no not because I didn't have the stones but more because I don't have a clue as to what I'm doing or why?

I have no idea of direction nor do I care. I have no target no expectation.

I check the average range for the time period the BB state and click and go with R:R principal for each side of the trade.

In all honesty I placed those trade in anger with little or no mental effort to prove a point at being ridiculed. It takes me all of 60 seconds looking at chart with S&R BB lines to decide on two entry orders.

I do not claim to be a whiz but merely a rookie based on text books following MAs for trend, BBs for breakout and R:R for managing trades. Simple really.

Whilst I try to get some gold nuggets from all the experts at T2W I like to question and challenge the elite before re-appraising my understanding.




Re: your 10 losing trades - I'm thinking if I place 5 different pairs of instruments with 2 entry orders each (up & down) then there is the possibility markets can move in synch and take all 10 out. Probability of this happening -> I have no idea. I'm just saying I have had both trades go against me in the past during periods of high volatility and market moves sideways. NFP can have this effect.

NFP or other big news announcements can also yield big returns providing market agrees on outcome.


But fair enough we'll run with it.


Do I understand correctly that if the next 10 trades are not losers but have some winners you'd consider there is merit in R:R?

Alternatively if over say a period of 4 weeks account shows profit irrespective of losers & winners? imo its not about the numbers but merely strategy to make money which RR is key ingredient.