Conrolling losses

Marco911 · Oct 17, 2008

Often I hear about people trying to get a risk reward of their trades to function around 3:1 (ideal) and yet a good friend of mine has reported consistent profits while having a risk reward of only 1:1

Why?

Something that traders don't often think about is their ability to increase the reliability of their trades. Now, this isn't always the case since it has been argued (and often proven) that most trades are random and the way to be successful is to have your winners outperform your losers.

Having a risk reward of 1:1 but a success rate of 7:3 still yields a profit.

$7000 up $3000 down = $4000 profit.

While many will probably disapprove, has anyone else come across running their account like this and remaining successful?

I still believe money management is important to bring the risk reward down but in my friend's case, he's often in trades that at some point are 10% against him before either swinging back to a profit or it will swing back to a lesser loss (lets say 2%) at which his 'indicators' signal to get out.

He's turning massive profits month over month ($100k a month on a 600k account no leverage being used).

I'm newer to the game and look up to him but question some of his ideas. It's hard to argue with a young man driving a Ferrari. Thanks for your input!

LiamH · Oct 17, 2008

Marco911 said:
Often I hear about people trying to get a risk reward of their trades to function around 3:1 (ideal) and yet a good friend of mine has reported consistent profits while having a risk reward of only 1:1

Why?

Something that traders don't often think about is their ability to increase the reliability of their trades. Now, this isn't always the case since it has been argued (and often proven) that most trades are random and the way to be successful is to have your winners outperform your losers.

Having a risk reward of 1:1 but a success rate of 7:3 still yields a profit.

$7000 up $3000 down = $4000 profit.

While many will probably disapprove, has anyone else come across running their account like this and remaining successful?

I still believe money management is important to bring the risk reward down but in my friend's case, he's often in trades that at some point are 10% against him before either swinging back to a profit or it will swing back to a lesser loss (lets say 2%) at which his 'indicators' signal to get out.

He's turning massive profits month over month ($100k a month on a 600k account no leverage being used).

I'm newer to the game and look up to him but question some of his ideas. It's hard to argue with a young man driving a Ferrari. Thanks for your input!

As far as i'm concerned there's nothing wrong with a strategy provided it turns consistent profits in the long term. I have read a few reports of people using 1:1 risk/reward and doing very well out of it although they trade high probability setups - As you say, provided you are right more often than wrong then a 1:1 risk/reward is perfectly acceptable.

I believe it's all down to the individual, personally I need a higher risk/reward ratio as I wouldn't be confident of being correct more than 50% of the time...

Chorlton · Oct 17, 2008

Marco911 said:
Often I hear about people trying to get a risk reward of their trades to function around 3:1 (ideal) and yet a good friend of mine has reported consistent profits while having a risk reward of only 1:1

Why?

Something that traders don't often think about is their ability to increase the reliability of their trades. Now, this isn't always the case since it has been argued (and often proven) that most trades are random and the way to be successful is to have your winners outperform your losers.

Having a risk reward of 1:1 but a success rate of 7:3 still yields a profit.

$7000 up $3000 down = $4000 profit.

While many will probably disapprove, has anyone else come across running their account like this and remaining successful?

I still believe money management is important to bring the risk reward down but in my friend's case, he's often in trades that at some point are 10% against him before either swinging back to a profit or it will swing back to a lesser loss (lets say 2%) at which his 'indicators' signal to get out.

He's turning massive profits month over month ($100k a month on a 600k account no leverage being used).

I'm newer to the game and look up to him but question some of his ideas. It's hard to argue with a young man driving a Ferrari. Thanks for your input!

Personally for me, I focus on the expectancy of the system. If the resulting value is positive then I should be profitable over the long-term.

IMO Medium-Long Term strategies exhibit a low win/loss ratio (40% ish) with a high Risk:Reward ratio, while the opposite is true for short-term (and intraday) strategies. This is only my view though.

Marco911 said:
.... but in my friend's case, he's often in trades that at some point are 10% against him before either swinging back to a profit or it will swing back to a lesser loss (lets say 2%) at which his 'indicators' signal to get out.

Personally, I would have a big concern trading like this. He is willing to initially accept a 10% loss but his indicators only signal for him to get out once the trade has rebounded to a lesser loss (2% as an example) !! What initial stop (if any) does he use? In other words, if the trade initially goes against him by, say 10%, what stops it from becoming 15%, 20% etc?

I'm assuming given the big initial swings that he is initially accepting that he is trading some form of mean-reversion system? These systems can be very profitable but from what I've researched only become so if they do not use initial stops (or have them wide enough to avoid prematurely stopping the trades out, which basically makes them ineffective), which means one has to have COMPLETE faith in the system.

All IMO,

Chorlton

new_trader · Oct 17, 2008

Marco911 said:
Often I hear about people trying to get a risk reward of their trades to function around 3:1 (ideal) and yet a good friend of mine has reported consistent profits while having a risk reward of only 1:1

Why?

Something that traders don't often think about is their ability to increase the reliability of their trades. Now, this isn't always the case since it has been argued (and often proven) that most trades are random and the way to be successful is to have your winners outperform your losers.

Having a risk reward of 1:1 but a success rate of 7:3 still yields a profit.

$7000 up $3000 down = $4000 profit.

While many will probably disapprove, has anyone else come across running their account like this and remaining successful?

I still believe money management is important to bring the risk reward down but in my friend's case, he's often in trades that at some point are 10% against him before either swinging back to a profit or it will swing back to a lesser loss (lets say 2%) at which his 'indicators' signal to get out.

He's turning massive profits month over month ($100k a month on a 600k account no leverage being used).

I'm newer to the game and look up to him but question some of his ideas. It's hard to argue with a young man driving a Ferrari. Thanks for your input!

Most people who talk about risk/reward in such a fashion are usually 'system' traders. They plug the rules of the system into a pretty piece of software and hit the back test button and keep modifying certain parameters until the results give 3:1

They then trade this live and lose all of their money

tomorton · Oct 17, 2008

Hi Marco - A 70% win rate sounds like your friend has developed a good strategy. But failing to develop his risk:reward to better than 1:1 is just lazy - he is just dawdling in the road, its nice and sunny and quiet right now, but eventually heavy traffic (in the form of unusual or irrational market behaviour) will come along and wipe him out.

Of course, if your friend is making money recently only, and only because of the curent unusual or irrational market behaviour, his gains are less impressive, as these conditions cannot persist indefinitely - where is his business plan then?

Conrolling losses

Marco911

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LiamH

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Chorlton

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new_trader

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tomorton

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