[es] Would You Day Trade a Set Up with This Risk / Reward Ratio?

[FFTrader 10]

I am testing a set up with 10 trades of 3 contracts each and the results (conservative estimates) yielded a net return after commission of 3.62 points.

 

This is for the ES and it is for day trading. Approximately 5 trades a day.

 

Without me detailing what it is, would you trade this set up?

[BlowFish 10]

Not enough info really there is a similar thread here http://www.traderslaboratory.com/forums/f208/4-system-rules-would-you-choose-7562.html#post90520 that mentions some things people would want to know to evaluate performance.

[FFTrader 10]

Not enough info really there is a similar thread here http://www.traderslaboratory.com/forums/f208/4-system-rules-would-you-choose-7562.html#post90520 that mentions some things people would want to know to evaluate performance.

 

Thank you BlowFish. I guess I am asking an expectancy question? That is, how much profits can I expect from a good set up ... my set up above basically means that after 30 contracts / 10 trades of 3 each, I get 3.62 points net. Per contract that is slightly over 1 tick on the ES. Although conservative in that 3.62 number, I am not sure I am close to a realistic target or too far away.

[BlowFish 10]

Thank you BlowFish. I guess I am asking an expectancy question? That is, how much profits can I expect from a good set up ... my set up above basically means that after 30 contracts / 10 trades of 3 each, I get 3.62 points net. Per contract that is slightly over 1 tick on the ES. Although conservative in that 3.62 number, I am not sure I am close to a realistic target or too far away.

 

3 crucial parameters are typical amount put at risk (in ticks will do), typical win size (again ticks are fine) and %winners. You need that info as a basis to evaluate anything much. This will indeed allow you to calculate expectancy but more importantly risk of ruin. These three parameters tend to have a direct effect on each other. For example if you decrease the amount you put at risk or increase your target % winners will drop.

[wshahan 10]

This is a reprint of a post I made regarding risk reward parameters. The core issue is risk reward management. The number of contracts or trades is irrelevant in my view. There is not enough information given to comment on the set up, and 10 trades is too small a sample to have any meaning.

 

 

The question of stop management seems to be a recurring theme for Traders Lab participants. I believe there is a misconception of how to use stops, and I would like to offer some thoughts on the subject.

 

Particularly in trading the E-mini with a small account size, stop management is critical. Because of the “noise” and the frequent poor range development during the day session, it is often the case of many stop-outs versus few winning trades equaling overall losses.

 

1. The purpose of a stop is to define risk. The general practice is to set a stop with a certain dollar amount or a percentage of the account or of the asset value of the account. Risk must be assessed in terms of market structure to be meaningful.

2. Once risk is established, it must be evaluated in terms of potential for the trade. I would suggest using a minimum 3 to 1 risk reward ratio as this would mean you overall would show an acceptable profit if you were successful in one out of three trades. If you are not profitable in one out of three trades, then you probably need to look at your methodology or trading style.

3. If risk, as defined above, exceeds acceptable account parameters, then the trade must not be taken. Be patient, another opportunity will occur. But as long as you stick to trades with a potential of at least (and hopefully higher)three to one return, with risk safe parameters for your size account, you will stay in business and make good money. Keep in mind that the majority of successful traders that I know have around 50% or fewer winners over the long term, but their winners are much bigger than their losers. And losers are part of doing business.

 

Hope this is helpful,

Spookywill

 

Perhaps the biggest advantage of this approach is to encourage the development of more effective entry criteria and discourage “chasing” trades which are no longer attractive from a risk/reward prospective. This alone can turn unprofitable trading into making money.

Edited May 12, 2012 by wshahan