Should risk be equal to reward?

This is a discussion on Should risk be equal to reward? within the General Trading Chat forums, part of the T2W Archive category; I still don't like the whole R:R thing - it never worked for me. IMO, stop loss placement is an ...

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Old Aug 14, 2010, 4:30pm   #9
Joined May 2010
Re: Should risk be equal to reward?

I still don't like the whole R:R thing - it never worked for me.

IMO, stop loss placement is an art and should depend on a number of different factors.

For example, if price is extremely volatile and trading in wider than average ranges, it makes more sense to have a wider stop than if price was trading in piddle mode - in a situation like this, the placement of your stop is mostly dependent on both your entry price and market conditions and if that does not meet with your risk/reward ratio, then you may as well: a) cut your loss quick and bail, or b) pray to the heavens that the market respects your stop and does not stop you out.
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Old Aug 14, 2010, 4:33pm   #10
Joined Apr 2010
Re: Should risk be equal to reward?

Quote:
Originally Posted by iota View Post
I'm still currently paper trading, but I've noticed that when my risk is 2/3 times that of potential reward from any given trade, the amount of winning trades has gone up as I don't get stopped out as easily as the market fluctuates. Obviously though if it goes the wrong way I'm losing substantially compared to the amount I would have gained if it went right.

Now I've started to wonder if this is a flaw in the way I trade?


Just do it, just do what is right for you.

You may try to do what someone else has proposed....

I guarantee they will not refund any losses.
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Old Aug 14, 2010, 5:41pm   #11
Joined Aug 2010
Re: Should risk be equal to reward?

There is a clear math relationship between winrate and win loss ratio (risk to reward). Sit down with pencil and paper and work it out. It will be worth it, and important you understand it.

If I or someone else just tells you, you won't "own" it. It should be your discovery.

Then Google expectancy and average trade.

Understanding that stuff is life and death to your success as a trader.

-The laziest man at LazyManForex-
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Old Aug 14, 2010, 6:10pm   #12
Joined Apr 2010
Re: Should risk be equal to reward?

Gino - Dexys Midnight Runners.

I'm not being flash....it's what i'm meant to do...
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Old Aug 15, 2010, 1:06am   #13
 
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Re: Should risk be equal to reward?

I think RR ratios are one of the many stereotypes that has infilterated the forex clan world. Let's say you enter a trade and high probability of a winning trade is 50 pips, but you go with the stereotype you need a 2:1 risk-reward ratio, so you set the stop for 25 pips. Let's say the trade backs up on you 30 pips, and then heads in your direction. The sterotype gave you a 25-pip losing trade instead of a 50-pip winning trade.
Someone mentioned your stops need to be based on TA's, which is so correct. When you base it on a strict amount of pips, then the stop becomes more arbitrary, and subject to the scenarios as I already mentioned.
Someone also mentioned that if you have let's say 1:2 ratio, but you are winning 80% of the time, then you have effectively offset the 1:2 by the high probability of the trades you entered. After all, in the scenario I drew up for you, if you had a 100-pip stop, then you would have had a 50-pip winning trade.
I monitor 28 pairs. There are trading opportunities on all the pairs. The only question is which ones of those yields the highest probability for it to go in my forecasted direction. Those are the pairs I'm going to trade.
If you have a way of calling the right direction on your trades but are getting stopped out prematurely, then it may not be a flaw in the way you trade, inasmuch that it could be a flaw in your concept of setting your stops, which again, all reverts back to the stereotypes we hear concerning the risk-reward ratio. The thing you might want to do is try demo trading. Decide the direction the pair will go in and how far it will go, then blindly find an S or R and set your stop several pips beyond that, regardless of the RR ratio, and then see how you do. If you are winning consistently over, i.e, 3 months, then that is your answer.


Quote:
Originally Posted by iota View Post
I'm still currently paper trading, but I've noticed that when my risk is 2/3 times that of potential reward from any given trade, the amount of winning trades has gone up as I don't get stopped out as easily as the market fluctuates. Obviously though if it goes the wrong way I'm losing substantially compared to the amount I would have gained if it went right.

Now I've started to wonder if this is a flaw in the way I trade?
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Old Sep 15, 2010, 6:44pm   #14
Joined Apr 2008
Re: Should risk be equal to reward?

1:3 Risk:Reward is a safe place to start,
unless you like trading as a form of gambling.

Seek trading opportunities with 3 to 1, or pass them by.

Carl
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Old Sep 15, 2010, 9:16pm   #15
Joined May 2010
Re: Should risk be equal to reward?

i think a while back i backtested eurusd daily high/low break 5 pip stop 15 pip target and came out with around 45% win rate with about 200 days, but 5 pips is peanuts so i never tried it
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Old Sep 16, 2010, 3:35pm   #16
 
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Re: Should risk be equal to reward?

What if they are 1:1 and those 1"1's yield 75% success rate?
What if your 3:1's yield 25% success rate?


Quote:
Originally Posted by OptionParty View Post
1:3 Risk:Reward is a safe place to start,
unless you like trading as a form of gambling.

Seek trading opportunities with 3 to 1, or pass them by.

Carl
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