trading with R:R < 1.0

there is popular saying in trading "cut your losers short, let your winners run".

I'm saying - balls to that, have small consistent winners and get stung every now and again.

Now first off, if you think about the maths side for a moment, it shouldn't really matter what your R:R is, as long as your risk as a sensible portion of your whole account. what really matters is that you have a positive expectancy for every trade you are making. So, say, comparing two strategies of the same expectancy, the one with r:r that it less than one isn't any better or worse than the one that the r:r is bigger than one.

Size of risk vs size of account comes into it as well but well just say that we can treat them the same. I'm not ignoring it, i'm just saying lets assume that the stategies already have taken that into consideration.

Now, the interesting bit: People say "one of the secrets to trading is to let your winners run and to cut your losers fast".

BUT, we know from experience that most people do the opposite - it's called the Disposition effect.

AND we also know that people naturally choose smaller losses over pro rata gains (Loss Aversion)

We also know that alot of people don't make it as traders because they can't manage to unlearn all the bad habits in thinking like this that everyone picks up in life.

So, what I'm saying is, why not make them work FOR you rather than AGAINST you?!

If you have an edge in your strategy, howver simple or complicated, you should be able to get the same expectancy from each trade by mixing up your r:r to less than one (please dont anybody start that money management, OK? if you think money management is relevant here go straight to jail and do not collect 200 pounds).

For the same expectancy, having r:r less than one makes waaaay more sense if you think about our natural biases?! collecting winners makes you feel good, having a p&l graph that is mostly upward sloping (I mean slow upline then sharp downline and the slow upline again, instead of shallow downline and big upline) makes you more likely to stick to your rules, re-enforces your discipline, and most of the time you are making money that makes you think you are good trader so you stick to your rules and so on and so on.

Alot of traders have problems because they go for r:r bigger than one, and the strings of small lossess causes them all sorts of problems in the mind like lack of discipline, changing rules and stuff.

So why doesn't everyone trade with a r:r that is less than 1?

just idea for talking, thats all

It's all about the nature of the market. A lot of trading "truisms" that are bandied about come from the 70s when markets trended like buggery. In those cases running profits and cutting losses made a heck of a lot more sense. Risk management therefore should be tailored to market too. Certainly scalping/market making running losses longer than profits is very very sensible

Same thing now with, say, being short stocks. Not very sensible to run a loss on that. If you're long though, you can run it and take small profits

Which is why we all know dinner bore idiots who bought RBS all the way down.

< 1.0 makes me feel sullied, like listening to Shania Twain.

Tried it in 2009 as one of my first experiments with day trading, didn't get on with it at all.

Was probably doing it all wrong.

I have a feeling the hare might have something interesting to say on this.

arabianights said:

It's all about the nature of the market. A lot of trading "truisms" that are bandied about come from the 70s when markets trended like buggery. In those cases running profits and cutting losses made a heck of a lot more sense. Risk management therefore should be tailored to market too. Certainly scalping/market making running losses longer than profits is very very sensible

Same thing now with, say, being short stocks. Not very sensible to run a loss on that. If you're long though, you can run it and take small profits

Which is why we all know dinner bore idiots who bought RBS all the way down.

Click to expand...

im loathe to say it, but "it allwayyys comes back"

(thats a joke everyone about people running losses for miles and miles)

Many of my trades have an R < 1

One of the most prevalent and damaging myths in popular circulation today on trading forums, websites etc is that a high R (2+) is required to make money.

Total garbage. Expectancy is all that matters. If you make money in the long run with a decent risk profile your R is irrelevant (just take a look at the insurance business for a good analogy).

+1

BlackBison said:

Many of my trades have an R < 1

One of the most prevalent and damaging myths in popular circulation today on trading forums, websites etc is that a high R (2+) is required to make money.

Total garbage. Expectancy is all that matters. If you make money in the long run with a decent risk profile your R is irrelevant (just take a look at the insurance business for a good analogy).

Click to expand...

robster970 said:

< 1.0 makes me feel sullied, like listening to Shania Twain.

Tried it in 2009 as one of my first experiments with day trading, didn't get on with it at all.

Was probably doing it all wrong.

I have a feeling the hare might have something interesting to say on this.

Click to expand...

would you think about doing it again?

like arabian says i think it does make a difference whay type of trading you are doing, but this is because i think in short term markets are mean reverting and long term they are trending (not going to talk about this here, its talked about with bramble somewhere)

p.s. I had massive crush on shania twain

robster970 said:

+1

Click to expand...

but robster he risked -3

BlackBison said:

Many of my trades have an R < 1

One of the most prevalent and damaging myths in popular circulation today on trading forums, websites etc is that a high R (2+) is required to make money.

Total garbage. Expectancy is all that matters. If you make money in the long run with a decent risk profile your R is irrelevant (just take a look at the insurance business for a good analogy).

Click to expand...

I agree Bison.

As far as risk reward goes it depends on the strategy and person. Kind of like BlackBison said earlier, the important thing is how often are your right and how often are you wrong. For example, If I am only right 40% of the time on my trades I have to have a low risk and hiher reward to make money after commissions. If I am right 70% on my trades then I can get away with having a little higher risk to reward. It is much easier to set standard r/r's when running a system because that takes the emotions out and everything is based on statistical data. If you are a discretionary trder though, you can keep track of your trades and record the following: average gain, average loss and accuracy rate... you can then back in to what risk reward you are able to take and still make money (obviously after tracking enough trades to make heads or tails of it).

DashRiprock said:

would you think about doing it again?

like arabian says i think it does make a difference whay type of trading you are doing, but this is because i think in short term markets are mean reverting and long term they are trending (not going to talk about this here, its talked about with bramble somewhere)

p.s. I had massive crush on shania twain

Click to expand...

I probably would but not right now. I'm more interested in trading more frequently by extending what I do on ES to YM and NQ instead of just using them for confirmation/non-confirmation.

Shania Twain = MILF. I know your type now Dash

robster970 said:

I probably would but not right now. I'm more interested in trading more frequently by extending what I do on ES to YM and NQ instead of just using them for confirmation/non-confirmation.

Shania Twain = MILF. I know your type now Dash

Click to expand...

Its v interesting you say with more frequency, because in my eyes (and only my eyes ok im not some wizard) the more frequently / shorter time of typical trade, the more attractive it becomes to have r:r < 1

DashRiprock said:

Its v interesting you say with more frequency, because in my eyes (and only my eyes ok im not some wizard) the more frequently / shorter time of typical trade, the more attractive it becomes to have r:r < 1

Click to expand...

exactly. few understand that which is why so many say you can't trade off small TF's. If you take countertrend trades off 1m or 5m charts then trying to get RR > 1 is ruin.

Peter

wackypete2 said:

exactly. few understand that which is why so many say you can't trade off small TF's. If you take countertrend trades off 1m or 5m charts then trying to get RR > 1 is ruin.

Peter

Click to expand...

I am half and half with you mate.

I agree with you on what you agree with me (with me?), but... about the charts...

on the 101 thread (i think) i had a good talk with bramble about this. his idea was that markets look the same whatever timeframe (or, specifically, the charts do), but my point is that what moves markets changes as you go up and down "timeframes".

DashRiprock said:

I am half and half with you mate.

I agree with you on what you agree with me (with me?), but... about the charts...

on the 101 thread (i think) i had a good talk with bramble about this. his idea was that markets look the same whatever timeframe (or, specifically, the charts do), but my point is that what moves markets changes as you go up and down "timeframes".

Click to expand...

Yeah, we don't usually agree on too much. Time to celebrate! :cheers:

cheers

Peter

DashRiprock said:

there is popular saying in trading "cut your losers short, let your winners run".

I'm saying - balls to that, have small consistent winners and get stung every now and again.

Now first off, if you think about the maths side for a moment, it shouldn't really matter what your R:R is, as long as your risk as a sensible portion of your whole account. what really matters is that you have a positive expectancy for every trade you are making. So, say, comparing two strategies of the same expectancy, the one with r:r that it less than one isn't any better or worse than the one that the r:r is bigger than one.

Size of risk vs size of account comes into it as well but well just say that we can treat them the same. I'm not ignoring it, i'm just saying lets assume that the stategies already have taken that into consideration.

Now, the interesting bit: People say "one of the secrets to trading is to let your winners run and to cut your losers fast".

BUT, we know from experience that most people do the opposite - it's called the Disposition effect.

AND we also know that people naturally choose smaller losses over pro rata gains (Loss Aversion)

We also know that alot of people don't make it as traders because they can't manage to unlearn all the bad habits in thinking like this that everyone picks up in life.

So, what I'm saying is, why not make them work FOR you rather than AGAINST you?!

If you have an edge in your strategy, howver simple or complicated, you should be able to get the same expectancy from each trade by mixing up your r:r to less than one (please dont anybody start that money management, OK? if you think money management is relevant here go straight to jail and do not collect 200 pounds).

For the same expectancy, having r:r less than one makes waaaay more sense if you think about our natural biases?! collecting winners makes you feel good, having a p&l graph that is mostly upward sloping (I mean slow upline then sharp downline and the slow upline again, instead of shallow downline and big upline) makes you more likely to stick to your rules, re-enforces your discipline, and most of the time you are making money that makes you think you are good trader so you stick to your rules and so on and so on.

Alot of traders have problems because they go for r:r bigger than one, and the strings of small lossess causes them all sorts of problems in the mind like lack of discipline, changing rules and stuff.

So why doesn't everyone trade with a r:r that is less than 1?

just idea for talking, thats all

Click to expand...

That is exactly what I have done. I used to try and aim for +2, +3 or whatever risk:reward but came to the conclusion that this is not always possible on the lower time frames.

In my methodology I now trade in multiples of 2 and take half off the table at 1:1 and move my stop to break even, then see what happens with the other half. This works really well on smaller time frames and has incorporated my demons into my methodology rather than battle to try and keep them at bay.

jd1888 said:

That is exactly what I have done. I used to try and aim for +2, +3 or whatever risk:reward but came to the conclusion that this is not always possible on the lower time frames.

In my methodology I now trade in multiples of 2 and take half off the table at 1:1 and move my stop to break even, then see what happens with the other half. This works really well on smaller time frames and has incorporated my demons into my methodology rather than battle to try and keep them at bay.

Click to expand...

thats the idea mate!

I'm celebrating for you :hic:

Also it worth saying... not for the benefit of us sensible people, but for the morons who will read this and blow up... IF YOU'RE PAYING A SPREAD YOU SHOULD NOT BE TRADING THE TIMEFRAMES WHERE THERE IS STRONG MEAN REVERSION, EXCEPT IN CERTAIN CIRCUMSTANCES WHICH YOU WILL KNOW ABOUT IF YOU ARE GOOD ENOUGH TO DO IT, AND THUS WON'T HAVE BOTHERED READING THIS FAR. IF YOU'RE STILL READING THIS FOR GOD'S SAKE DON'T DO IT.

yeah thanks for killing my thread arabian :/

joking LOL