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'm still currently paper trading, but I've noticed that when my risk is 2/3 times that of potential reward from ...

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Old Aug 12, 2010, 9:17pm   #1
 
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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?
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Old Aug 12, 2010, 9:18pm   #2
 
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Re: Should risk be equal to reward?

Yes it is.
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Old Aug 12, 2010, 9:24pm   #3
 
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Re: Should risk be equal to reward?

iota started this thread Nice 'n' concise.

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Old Aug 12, 2010, 10:39pm   #4
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Re: Should risk be equal to reward?

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.
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Old Aug 13, 2010, 1:59pm   #5
 
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Re: Should risk be equal to reward?

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
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Old Aug 14, 2010, 12:46am   #6
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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?
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.
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Old Aug 14, 2010, 2:50pm   #7
 
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Re: Should risk be equal to reward?

iota started this thread
Quote:
Originally Posted by RockyRacoon View Post
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.
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.
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