Should risk be equal to reward?

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?

Yes it is.

Nice 'n' concise.

Entry, target and stop levels all come ideally from TA, not money management. This is what makes technically-based trading so hard. What I mean is, if you see an entry of a type that normally gives a 100pts move, you should avoid simply using that figure to calculate your risk, the stop position also has to be soundly based on TA.

So, when you see ads and newsletters and books where they circle a great entry on a chart and wow, look at all the money you could have made, don't be over-impressed. They should have put at least 3 markers on the chart - entry, stop and target. But that doesn't sell so well - a stop is a visual reminder this investment could be a loser, a target suggests it's not going to be a quick road to riches.

If risk equals reward then as long as you have a greater than 50% trade success rate, you will make money.


If reward is 100 times risk but only 1 trade in 110 is successful then you will lose money

Risk can be more than reward and still give you profits

iota said:

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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What is your time frame?

Scalp? Day trade? Swing?

Scalping generally means a much tighter stop than swing trading - etc.

You forget about "ratios" and concentrate on highest probability entries. If you learn to be patient and learn to adhere to proper discipline, your entries will get better - to the point that they will automatically keep whatever losses you incur acceptable.........in other words, the losses will be small enough to make back those losses without going into "revenge trading mode"..........which is another discipline that needs to be learned.


Let us know how you do.

RockyRacoon said:

What is your time frame?

Scalp? Day trade? Swing?

Scalping generally means a much tighter stop than swing trading - etc.

You forget about "ratios" and concentrate on highest probability entries. If you learn to be patient and learn to adhere to proper discipline, your entries will get better - to the point that they will automatically keep whatever losses you incur acceptable.........in other words, the losses will be small enough to make back those losses without going into "revenge trading mode"..........which is another discipline that needs to be learned.


Let us know how you do.

Click to expand...

Not that I have vast amounts of experience to draw from, but I would say swing/position.
I'm back-checking All TFs >1hr over long periods to look for 'context' (I can't think of a better way to explain it) and then using 15m/30m for to look for entries and exits.

Sounds to me, that you have learnt that your stops were too close before? and you are getting the direction of the trend right? so maybe you are just not letting your winners run. If you review your winning trades, did they go a lot further? just a thought

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.

iota said:

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?

Click to expand...

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.

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-

Gino - Dexys Midnight Runners.

I'm not being flash....it's what i'm meant to do...

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.

iota said:

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?

Click to expand...

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

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

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?

OptionParty said:

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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4xpipcounter said:

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?

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if it's a system then you could just backtest and see what's better anyway

That is part of the reason I was adrressing the following comment, "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."
In other words, if your trading system, proves to be a winning system, what diffeence is there is it is 1:! R/R?
Also, there is hardly an indiactor that doesn't lag, so backtesting is not necessarily the answer. Forward testing on a demo is the best option. Of course, most people don't like that idea, because it takes time and work.

Chartsy said:

if it's a system then you could just backtest and see what's better anyway

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