This is a discussion on The Basics of Trading within the First Steps forums, part of the Reception category; fingers crossed (I think I CRACKED it)...

 Jan 29, 2003, 12:53am #21 Joined Dec 2002 fingers crossed (I think I CRACKED it) Attached Thumbnails
 Jan 29, 2003, 12:59am #22 Joined Dec 2002 colours are CR*P (I can cancel the WHIZZ KID now (lol)
 Jan 29, 2003, 1:51pm #23 Joined Jan 2003 Hello everybody, particularly Paul and Jonny T I think your Risk/Reward calculation is a bit misleading. The obvious inference is that you can improve the ratio by either reducing your stop loss or increasing your target price. Either of these could result in disaster. A better way of looking at risk and reward is to include some assessment of the probability of the SL being breached and of the target being reached. For example, you might conclude that, based on the figures you mentioned, the probability of 820p being breached was 20%, but increasing the SL to 850 would increase the probability to 50%. Similarly, it seems logical to assume that the higher you set your target price, the lower the probability of achieving that figure. At the price quoted by Paul (862p) you might assess that the probability of reaching 900p was 75%, but that would decline as the target price increased. You might conclude that the probability of reaching 1080 within a reasonable timescale was only 35%. This would give (for want of a better term) a Probability Ratio of 35/25 or 1.4. In the figures I have given, the Probability Ratio for a target price of 900p with a SL of 820 (ie a small, quick profit) would be 3.75. If the SL was reduced to 850 the Probability Ratio would give a negative for a target of 1080 and a ratio of 1.5 for a target of 900p. This approach gives a more realistic assessment of the risk involved, but does require an estimate of probability for the target and SL. I put this suggestion forward for discussion. John
 Jan 29, 2003, 3:32pm #24 Joined Dec 2001 Hi John, Surely this depends on timescale? I wasn't looking at a day or swing trade, more an intermediate trade. I stand bu my guns. As Bush is saying to Saddam __________________ Trading Mentor
 Jan 29, 2003, 4:15pm #25 Joined Jan 2003 Hello JonnyT Time is definitely another factor but maybe we're talking at cross purposes. My post was trying to introduce a method which gave a realistic estimate of the probability of a trade succeeding. Your calculation seemed to imply, especially to someone without experience, that the probability of success in the trade is about 73% - and if you're getting that sort of success rate, can I shadow you? Mine implies a success rate of about 40%. I've no doubt that your experience tells you the true probability of success and the Risk/Reward ratio as you define it is a useful tool, but it doesn't show the overall risk of a trade. Trader 333's post also introduces some caution by highlighting the percentage of successful trades. John PS - I lived in Ruddington until middle of last year. Small world - just what is the probability of that?
 Jan 29, 2003, 4:33pm #26 Joined Dec 2001 Hi John, Very small world! I agree the RR may fool a complete novice, but I'm sure I never meant to suggest or infer a 73% success rate. JonnyT __________________ Trading Mentor
 Jan 29, 2003, 7:17pm #27 Joined Feb 2002 Thank you FTSE B and all the others who replied.I have read all the responses to my question and am learning more and more about risk reward and hope to see more advice on the subject. Im keen to learn more about this because it will help me to reduce my cr*p trading.I have been making too many mistakes and was thinking of packing it in. __________________ fluke
 Jan 29, 2003, 7:40pm #28 Joined Nov 2002 HI I WOULD LIKE JUST TO DARE TO TELL YOU ,ALL THE EXPERTS, THIS IS SUPPOSE TO BE A BEGGINERS FIRST STEPS , AND I DID PROPOSE THE START OF THIS BOARD FOR A KIND OF FIRST REAL STEPS ON TRADING, I BELIEVE IN ALL THIS RISK/REWARDS, PROBALITY'S AND EVERTHING ELSE BUT HONESTLY FOR ME I AM STILL A LITTLE BIT BEHIND THAT POINT, AS ALSO THERE IS THE PROPER BOARD FOR YOU CHANGE ALL YOUR IDEAS,OPINIONS AND DOUGHTS IN A MORE ADVANCED LEVEL, WHICH I ALSO BELIEVE IS WHAT YOU REAL NEED... PLEASE DON'T TAKE ME WRONG BUT I THINK WE ARE LOOSING A LITTLE THE " MEANING" OF WHY THIS THREAD STARTED... __________________ T.C
 Jan 29, 2003, 11:26pm #29 Joined Nov 2001 Decorum please Please don't shout TC __________________ neil ....Indicators show the past. Price Action "Indicates" the future.
 Jan 31, 2003, 7:21pm #30 Joined Feb 2002 The Secret to Trading Hi all I thought it was time to show you the solution to trading. The hidden secret that will change your life forever, and this is it:                                                                     MONEY MANAGEMENT, Money management is king. In the land of the trader, money management has ruled and killed all the traders who don’t believe in it. This is nothing new, but few new traders use money management wisely and get “killed” because of it. There is a myth among new traders that you HAVE to be right more times than wrong. This table is one that I’ve taken from “The Master Swing Trader” by Alan Farley:
75%100£800£2000£10,000
50%100£800£600£10,000
25%100£800£133£10,000
What the table shows is that to be profitable, or more profitable, you can either work on being right more often, or reducing the losses. Most new traders will let their losses run and run, which means the trades that follow must be right to claw back the money they have lost. This is a table that Chris Manning displays, and it really shows the importance of cutting your losers
% loss    % gain needed
to break even
10%11%
20%25%
50%100%
80%400%