Risk:Reward question

[I'vereadthemall]

Of course, because I just told you that for free you will completely ignore it.

 

[new_trader]

There has been a plethora of academic research done into the benefits of paying for knowledge Which has been proven with scientific studies that if you pay for something such as education or advice you receive more value from it.

Psychologically and in practice.

Psychologically because if you paid for it you place more internal value on the information.

In practice because if you paid for the information and place more internal value on the information you are more likely to follow it.

This type of research is from Harvard, Yale etc. it been pretty much accepted across academia.

Did you pay for the results of the research or did you get it for free? Was it any less valuable because it was free?

This is the subject of debate. Is the quality of free information lower than paid information? Or let me rephrase it this way, is poor quality information improved simply by making people pay for it?

 

[Triggerfish]

Exactly new_trader, when people pay for something, they pay because they have been "manipulated" to "believe" in something which always comes down to the transfer of money.....the real intent behind the surface. In fact, I know that the best advice on planet earth is in actual fact FREE to everyone yet they choose differently due to their own ignorance.....people are simply "mislead" are clearly under "delusion"!

 

[I'vereadthemall]

I am not saying it isn't daft in some cases but I was just pointing out that certain people will genuinely benefit from paying for something that they could have had for free.

A simple example would be a new trader reading on this forum to never risk 50% of their account on a single trade. They may or may not heed that advice.

The studies I am referring to indicate that if that same trader had paid 100 dollars to be told not to trade more than 50% on a single trade they are more likely to follow the advice.

More than that, the studies show that if they paid 1000 dollars for the advice they are even more likely to follow it again.

Personally I think it's stupid but the studies indicate that there are a lot of stupid people!

Ultimately, if the person who paid for the advice is more likely to not risk 50% on a trade, because they paid to be told not to do so...they have clearly benefited from paying for the advice.

 

[Purple Brain]

I have noticed that I miss some trades, and examining this issue closely I have noticed that in the past I have not took these trades either, so I thought I would ask people on this thread their opinions.

Lets say you see a trade, and once appropriate due diligence is followed and all rules of your methodology are met the trade has a potential 1:1, and you risk 1% of your acc. on all trades.
Would you still take the trade if the risk:reward was 3pips risked for 3 pips gained, and still apply a 1% account allocation on such trades(assuming slippage, and spread are already taken into consideration).

I look forward to your response chaps.

Best
John

The concept of R:R as having any basis in or making any sense ahead of taking a trade seems to be over-worked. I've seen little evidence of anyone on this site making a call for a live trade that has both the risk and target provided at the time the trade is opened. And even when that relatively rare event does occur, it is even rarer the trade runs to that target.

R:R is useful in hindsight as a basis to tweak entries and exits to put up less risk in relation to average reward, but even that seems to be just to be a numbers game. Getting more right than wrong is a significant driver for me, even if that means some yield just a fraction of my risk in profits, that's still good news for the bottom line.

So your hypothetical of risk 3 pips for a potential reward of 3 pips has no meaning for anyone who doesn't sign up to the R:R myth. Given the general lack of response to your question this would suggest the majority do not sign up to it.

To answer you final point, I use a fixed percentage of my capital regardless of setup - using the pips risked to determine the position size. Others will not. If your point was to suggest would it make sense to increase amount risked where the move was expected to me small in absolute terms - no, of course not. You have no idea ahead of time which moves are going to be small and which are going to be large. You control your risk identically for all trades.

edit: Not sure why I'm taking the trouble to respond to someone who has shown themselves to be rather disagreeable to the point of rudeness to a number of other members, but it doesn't hurt to allow room for manoeuvre.

 

[I'vereadthemall]

I Disagree that you should control your risk identically for all trades.

For example, stock ABC is $10.00. You have a $10000 account and constant risk of 0.5% which you will use to determine your position size after knowing where you stop will be.

Let's say you have a trade setup that requires a $1 stop-loss.

So your $50 dollar risk with a $1 stop loss means you can buy 50 shares.

Now if the stock went bankrupt overnight and traded at $0.00 in the morning you will only have lost $500.

If on the other hand your stop was only $0.10 but you kept risk constant you would have been able to buy 500 shares. If the stock trades at $0.00 in the morning you will have lost $5000.

With forex market this is obviously not going to happen but the exercise should show that the overall number of pips used for a stop-loss should be considered as a percentage of the entire possible number of pips that it could go up or down by in a single print.

If you use a constant risk percentage of your account regardless of how many pips your stop-loss is, you are ignoring an important aspect of trading leveraged markets.

To summarise, the closer your stop-loss is to entry...the smaller percentage of your account you should risk on the trade.

 

[Purple Brain]

I Disagree that you should control your risk identically for all trades.

For example, stock ABC is $10.00. You have a $10000 account and constant risk of 0.5% which you will use to determine your position size after knowing where you stop will be.

Let's say you have a trade setup that requires a $1 stop-loss.

So your $50 dollar risk with a $1 stop loss means you can buy 50 shares.

Now if the stock went bankrupt overnight and traded at $0.00 in the morning you will only have lost $500.

If on the other hand your stop was only $0.10 but you kept risk constant you would have been able to buy 500 shares. If the stock trades at $0.00 in the morning you will have lost $5000.

You’re comparing chalk and cheese. The op was very specifically talking about forex. To discuss trading other than intraday (holding positions in a closed market overnight) is quite a different ballgame and one which requires a significantly different approach and rather more than just the calculation of position size based on initial stop.

With forex market this is obviously not going to happen but the exercise should show that the overall number of pips used for a stop-loss should be considered as a percentage of the entire possible number of pips that it could go up or down by in a single print.

Ridiculous in the same way predetermination of R:R is. You can’t know how many pips it’s going to move in a tick, bar or any other measure of time.

If you use a constant risk percentage of your account regardless of how many pips your stop-loss is, you are ignoring an important aspect of trading leveraged markets.

Makes no sense. Fixed percentage tells you how big a position you can carry for a given number of pips risk. Leverage is leverage – that determines how much margin you put up for that risk.

To summarise, the closer your stop-loss is to entry...the smaller percentage of your account you should risk on the trade.

Good luck with that one. I suspect if you used that strategy you’d be out of the game in no time.

 

[malaguti]

To summarise, the closer your stop-loss is to entry...the smaller percentage of your account you should risk on the trade.

so you would risk more of your capital, with a stop that's further away?
I'm not sure thats really what you mean. Surely all trades should be treated equally..if you lose, you don't want one trade to be any bigger than your successful ones.

 

[Shakone]

The only issue I do have is for eg, Shakone has answered my question, and then a few posts later say's the question doesn't make sense, well if it doesn't make sense, then how has he managed to answer it...

Yes, it was impressive. The reason it doesn't make sense to me, is that it is like asking how long is a piece of string. You can't base a trading system on just a fixed risk:reward ratio. And if you do have a trading system, then that will help to determine the risk:reward, or more importantly the average loss:average win. The question on its own seems pointless to me. What is the probability of winning with 1:1 risk reward? How does that vary as you adjust the number of pips?

I have asked you questions earlier. You haven't answered.

He then insinuates that I should ask my mentor, but that's like running back to your biology teacher when you have a question about sex.

Were you mentored in sex by your biology teacher?

 

[I'vereadthemall]

You’re comparing chalk and cheese. The op was very specifically talking about forex. To discuss trading other than intraday (holding positions in a closed market overnight) is quite a different ballgame and one which requires a significantly different approach and rather more than just the calculation of position size based on initial stop.

I agree, thats why i said obviously it wouldn't happen. I was simply trying to give an extreme example of why i think tight stop-losses are more dangerous than wider stop-losses. Didn't mean to offend.

Ridiculous in the same way predetermination of R:R is. You can’t know how many pips it’s going to move in a tick, bar or any other measure of time.

I'm the first to say that you can never know whats going to happen next, but we use past history to give us the average statistical likelihood of what might happen next. Jobs number can gap an intraday strategy more than 3 pips.

Makes no sense. Fixed percentage tells you how big a position you can carry for a given number of pips risk. Leverage is leverage – that determines how much margin you put up for that risk.

Right. I should have referred to margin. I must have misunderstood you too.
I took it that you were saying if the stop-loss on your trade was 3 pips you'd buy 4 lots but if it was 30 pip stop loss you'd buy 4 mini-lots.

Good luck with that one. I suspect if you used that strategy you’d be out of the game in no time.

It is the strategy I use and I've been doing so for years. I admit though, I trade stocks more than forex.
I didn't realise that because OP was talking about Forex it was not allowed to refer to other financial markets. I apologise.

 

[I'vereadthemall]

sorry, i don't understand how to respond to specific sentences properly! I'm not a forum type of person.

 

[Purple Brain]

I didn't realise that because OP was talking about Forex it was not allowed to refer to other financial markets. I apologise.

No need to apologise, but it makes sense to respond in context. I'm sure there will be many who would be delighted to follow your thoughts on position sizing and leverage on stocks for other than intraday trading in the thread you start for that topic. In that way, those that are interested can expend time & energy on it while those who are not, will not.

 

[Purple Brain]

sorry, i don't understand how to respond to specific sentences properly! I'm not a forum type of person.

Gives the game away when someone says something like that, especially with an ego-nick like yours.

Is there anyone on this site other than the less than one dozen really useful members and one troll with a thousand multinics?

Tiresome.

 

[I'vereadthemall]

I still don't see how risking 3 pips can be the same as risking 30 pips if the dollar amount risked stays the same?

With 3 pips you buy 4 lots but with 30 pips you buy 4 mini-lots. Surely the 4 lot position is riskier if we know that the price could gap more than 3 pips even intraday.

 

[Purple Brain]

I still don't see how risking 3 pips can be the same as risking 30 pips if the dollar amount risked stays the same?

On the basis you might be genuine, to use your example of a $10,000 account where 0.5% is risked on every trade. A trade where you risk 3 pips means you take a position size on the pair in question that will deliver a $50 loss if it moves 3 pips against your entry level. For a 30 pip risk, you take a position size that will deliver a $50 loss if it moves 30 pips against your entry level. The latter will have a position size 10 times smaller than the former.

With 3 pips you buy 4 lots but with 30 pips you buy 4 mini-lots. Surely the 4 lot position is riskier if we know that the price could gap more than 3 pips even intraday.

Your position sizing based on the data is correct and obviously smaller stop sizes are riskier - in any market, but the term gap has no real application in a continuous market in which the term spike seems to be preferred.

 

[BeginnerJoe]

A simple example would be a new trader reading on this forum to never risk 50% of their account on a single trade. They may or may not heed that advice.

The studies I am referring to indicate that if that same trader had paid 100 dollars to be told not to trade more than 50% on a single trade they are more likely to follow the advice.

You hit the nail on the head. I have given the OP great value for free by telling him 3 pip trading was suicidal. He turned around and told me it's wrong. Had I charged him 10k for the information, he would have taken the information and valued it accordingly.

 

[Mr Fox]

You hit the nail on the head. I have given the OP great value for free by telling him 3 pip trading was suicidal. He turned around and told me it's wrong. Had I charged him 10k for the information, he would have taken the information and valued it accordingly.

Could you please tell me where I said you were wrong.
Thank you.

 

[Purple Brain]

Could you please tell me where I said you were wrong.
Thank you.

http://www.trade2win.com/boards/psy...80300-risk-reward-question-4.html#post2209312

Your footnote/P.S. serves as a blanket refutation of everything BeginnerJoe posts, ever.

You're welcome.

 

[I'vereadthemall]

On the basis you might be genuine, to use your example of a $10,000 account where 0.5% is risked on every trade. A trade where you risk 3 pips means you take a position size on the pair in question that will deliver a $50 loss if it moves 3 pips against your entry level. For a 30 pip risk, you take a position size that will deliver a $50 loss if it moves 30 pips against your entry level. The latter will have a position size 10 times smaller than the former.

Your position sizing based on the data is correct and obviously smaller stop sizes are riskier - in any market, but the term gap has no real application in a continuous market in which the term spike seems to be preferred.

In that case what is wrong with my original response to keeping risk on the account constant?

The larger position for a smaller stop-loss would mean that you are at greater risk because of the potential loss due to a spike.

Using my stock example but with forex...

You have a 3 pip stop, buy 4 lots and it spikes 5 pips past your stop-loss without getting a fill.

You have a 30 pip stop, buy 4 micro-lots. Assuming that the currency spiked 5 pips past your stop in this case you would lose less of your account than you would on the 3 pip trade.


What did I originally say that is different to that? Or am I missing something. You seemed adament in your original response to me that i was wrong about something.

 

[Purple Brain]

In that case what is wrong with my original response to keeping risk on the account constant?

The only thing wrong with it is that isn't what you said. You said quite the opposite. Post #46

"To summarise, the closer your stop-loss is to entry...the smaller percentage of your account you should risk on the trade. "​