What is Your Risk Reward Ratio?

[Obsidian 10]

The bigger the reward the lower the probability of the tp being hit.

The lower the reward the higher the probability of the tp being hit.

do you have a fixed r/r ratio or does it depend on the setup?

[BlueHorseshoe 10]

  Obsidian said:

The bigger the reward the lower the probability of the tp being hit.

The lower the reward the higher the probability of the tp being hit.

do you have a fixed r/r ratio or does it depend on the setup?

 

I don't have a fixed R/R Ratio, although my average loss is almost twice my average win.

 

The probability of the tp being hit is complex and in some cases will be indeterminate. One of the key factors involved is obviously whether a stop loss is also used. If no stop loss is used, the probability of a small target being hit sooner is greater, whether the probability of it being hit at some time is greater I'm not so sure. Whether the target is above or below current price is also a theoretical factor, as price is bounded below but not above.

 

BlueHorseshoe

[BearBullTrading 10]

I do not use a risk:reward ratio...

 

If I have a reason to enter, I want to enter and at this initial point I do not know where I will exit

 

Once I have entered a trade, every tick and trade thereafter will have some consequence on the market outside of my control....therefore

 

My job is to stay in until I see a "reason" to get out...That "reason" may come 1 tick..10 ticks...100 ticks, whatever, after I have entered.

[SIUYA 11]

depends on setup....and even in any testing I have done this is the same

then depends on what happens through out the trade.

I have tried the fixed r:r - just did not work for me as it did not make sense.

 

The one golden rule to stick by is never amend your stop and make it bigger.

[BlueHorseshoe 10]

  SIUYA said:

depends on setup....and even in any testing I have done this is the same

 

Although I also don't have a fixed r:r ratio at the time of entry, one thing that I always find useful when testing a strategy is to use a 1:1 ratio and then optimise this single value. If the optimal value doesn't produce impressive results then it is unlikely that there is any edge in the entry. It's a bit like saying 'if I buy when this signal occurs and I allow the market to move an equal amount N in each direction, then if the entry signal has an edge I ought to get better results than a coin toss for some value of N . . .'

 

This doesn't mean to say that the strategy couldn't be profitable as the edge can obviously come from an exit, but it is always useful to know from what element(s) of the strategy the edge is derived.

 

It is often argued that focussing on entries rather than exits is a sign of an amateur ("the exit is where the money is made"). The same authors often promote the idea of a very small r:r ratio (Van Tharp would be a classic example, who is pretty insistent that the reward must be many multiples of the initial risk).

 

The positive expectancy of the strategy I trade is derived mostly from the entry signals, however, and from an adaptive exit that calls for greater risk than reward. This flies in the face of popular advice. So I think that better advice than the overly prescriptive approach that many authors give would be something like:

 

Know your strategy. Understand from which elements it derives a positive expectancy. Work to maximise the dollar output from this edge through intelligent position sizing.

 

Hope that's helpful,

 

BlueHorseshoe

Edited May 12, 2012 by BlueHorseshoe

[Obsidian 10]

  SIUYA said:

...I have tried the fixed r:r - just did not work for me as it did not make sense...

 

I think the same...Besides market conditions change, you adjust your targets, stops accordingly...

maybe fixed r/r makes sense for scalpers but long term is different...

[wshahan 10]

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 an 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
add on

[Obsidian 10]

mathematically 10pips:30pips and 30pips:90pip have the same ratio..how about in reality? big sharks can eat you before you reach your goal

[SIUYA 11]

  Obsidian said:

mathematically 10pips:30pips and 30pips:90pip have the same ratio..how about in reality? big sharks can eat you before you reach your goal

 

isn't that where context comes into play.....

sometimes, the odds vary depending on where in the scheme of things your pattern is occurring.

 

Which is why a lot of this is only really able to be looked at from a historical perspective -ie; to say "when I use this pattern it gives me this sort of R:R", to then set this in stone does two things - it means you will not ever increase the R:R ratio in your favour, and if the past does not represent the future then its more likely than not to actually diminish with time (???)

Hence why have a fixed R:R as opposed to a guideline of what to expect?

[wshahan 10]

Quote:

Originally Posted by Obsidian »

mathematically 10pips:30pips and 30pips:90pip have the same ratio..how about in reality? big sharks can eat you before you reach your goal

isn't that where context comes into play.....

sometimes, the odds vary depending on where in the scheme of things your pattern is occurring.

 

Which is why a lot of this is only really able to be looked at from a historical perspective -ie; to say "when I use this pattern it gives me this sort of R:R", to then set this in stone does two things - it means you will not ever increase the R:R ratio in your favour, and if the past does not represent the future then its more likely than not to actually diminish with time (???)

Hence why have a fixed R:R as opposed to a guideline of what to expect?

 

I am not sure I understand the above comment in the context of my post on defing risk in a trade. The three to one risk reward objective is the minimum objective, Often a 3/1 trade turns into a 5 to 10 times return over risk. But, as long as your trades maintain at least a 3 to 1 risk reward ratio, you will stay in business and make money.

[phantom 16]

  Obsidian said:

The bigger the reward the lower the probability of the tp being hit.

The lower the reward the higher the probability of the tp being hit.

 

Say what???

 

I think that the probability of the target point being hit vs. getting stopped out is a function of the types of trades one engages in. And if one is willing to set the risk stop far enough away from one's entry point, then the probability of loss on a trade with wide stops and a large profit expectancy could be a much lower than a short term trade with narrow stops. (Think day trader vs position trader)

 

i.e. deep pockets don't even use stops in a lot of cases...

 

It all depends!

[wrbtrader 10]

  BearBullTrading said:

I do not use a risk:reward ratio...

 

If I have a reason to enter, I want to enter and at this initial point I do not know where I will exit

 

Once I have entered a trade, every tick and trade thereafter will have some consequence on the market outside of my control....therefore

 

My job is to stay in until I see a "reason" to get out...That "reason" may come 1 tick..10 ticks...100 ticks, whatever, after I have entered.

 

I too don't use fixed risk:reward ratio as a discretionary trader (no automation nor coded method). In my trading, fixed are counter-productive because the price action doesn't behave the same from one trade to the next trade. Thus, if the price action was the same "after" entry from one trade to the next trade...fixed risk:reward ratios makes a lot of sense when applied to every trade. In reality, price action rarely (arguably never) behaves the same every second, every minute, every hour, every day, every week, every year. Yet, I won't enter a trade where I believe the risk is greater than the reward. Also, my risk from trade to trade is not the same. Therefore, if the risk is to large for a particular trade...I don't take the trade even though that exact same risk was not too large for a prior trade I had taken.

 

Simply, my risk and my reward are adaptable to current price action. ) that's rarely the same from one trade to the next trade. Thus, one trade the reward may have been 40 ticks while risking 10 ticks and then the next trade the reward may be only 5 ticks while risking 3 ticks.

 

The markets or its "market context" determines our reward and that reward will be different every trade because the markets is different every trade "after" entry. Yet, we do have a little more control over the risk issue because it can be determine "before" entry in comparison to the "reward" being determined by the markets "after" entry.

Edited May 15, 2012 by wrbtrader

[BlueHorseshoe 10]

  wshahan said:

I would suggest using a minimum 3 to 1 risk reward ratio as this would mean you overall would an 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.

 

This is the sort of very generalised advice that I was cautioning against in my previous post in this thread (see first page). There are plenty of ways to trade profitably using all sorts of R:R combos, and risk does not always have to be significantly less than reward.

 

Also, I am assuming that when you say '3 to 1' risk to reward you actually mean '1 to 3' risk to reward, whereby 1 unit is risked for a 3 unit reward (or alternatively a '3 to 1' reward to risk)?

 

While it is true that a 1:3 risk reward ratio would yield a profit if you were successful in 1 out of 3 trades, a 6:1 risk reward ratio would yield the same profit if you were successful in 7 out of 8 trades. You don't find many traders who will risk 6 units to make 1 (if you were scalping the ES with a $200 profit target, would you want your stop-loss $1200 away?) . . . But then you also won't find many traders who turn a consistent profit.

 

R:R ratios are a complex function of trading strategies; more often than not they are something that will arise organically from the development process and shouldn't need to be over-thought. Risk reward ratios cannot be prescribed for all strategies or traders in all markets in the way that you seem to be implying in your post.

 

BlueHorseshoe

[Obsidian 10]

  SIUYA said:

isn't that where context comes into play.....

sometimes, the odds vary depending on where in the scheme of things your pattern is occurring.

 

Which is why a lot of this is only really able to be looked at from a historical perspective -ie; to say "when I use this pattern it gives me this sort of R:R", to then set this in stone does two things - it means you will not ever increase the R:R ratio in your favour, and if the past does not represent the future then its more likely than not to actually diminish with time (???)

Hence why have a fixed R:R as opposed to a guideline of what to expect?

 

In fact I am against a fixed r:r since markets change, conditions change. Of course maybe this is different story for very short term traders. When you focus on a fixed value, you miss big movements..is what I learned

[JackWell 10]

  Obsidian said:

The bigger the reward the lower the probability of the tp being hit.

The lower the reward the higher the probability of the tp being hit.

do you have a fixed r/r ratio or does it depend on the setup?

 

When I estimate a trade's RR I do it according to the closest significant supports and resistance. My goal is to take trade of RR ratio 1:2, but my minimum is 1:1.5 – I never go lower than that. It is important to understand that the RR is determined by the chart and not randomly. Traders tend to tell themselves something as "oh, I see than the SL is 100 pips down, let's my TP 200 pips above, because I need RR of 1:2"… this is clearly a mistake. Don't force the RR on the chart just because you feel that the trade looks great, let the chart tell you what is the RR.

[todds 10]

My trading success improved dramatically when I decided to take profits at 2 times risk on nearly all of my trades. The only time I veer from this is if price moves with dramatic momentum in my favor. Then I will trail closely until stopped.

 

Yes, I miss out on some good runs, but it doesn't matter. With this philosophy I can be successful only 50% of the time and end up well ahead.

[Jack Francisco 10]

To me, R/R is heavily depended on the TF. the higher the TF the higher the R/R. i choose the 4h TF because it gives me higher R/R compared to 1h TF. i dont take trade whose R/R is below 1:3. to be frank, i know i am not going to be right all the time, so i only take trades that will take little from me when i am wrong and give me PLENTY when i am right. moreover.. just my way :crap: