Risk / Reward

advfntrader · Jun 9, 2009

following on from my last post "positive attitude" I've been trying to simplify my thought process right down....

as long as I risk 2% of my account on any trade and ensure that my risk/reward is 2:1 or greater I should be OK in the long run ?...

I mean I'd have to be extremely unlucky to blow my account and have a whole string of losers if I stick to this.

I guess you just have to set the stop / limt and walk away

NetTecture · Jun 9, 2009

depends on your win percentage.2:1 win is good on average, but if you loose 99% of the trades... that still can blow your account with 2% risk.

If you have 90% profitable trades, 2% max risk.... account loss chance is extremely close to 0.

peto · Jun 9, 2009

Your win rate will need to exceed 33% for the 2:1 r/r to produce a positive outcome. Without an edge of some sort (i.e. effectively random entries) it won't because your closer stop will be hit more often than your limit.

Hotch · Jun 9, 2009

MrGecko · Jun 9, 2009

Before you think about what your R:R and hit rate need to be, I reckon you should sit down with a piece of paper and explain to yourself what your edge is supposed to capture and how you are going to identify it.

Captain Currency · Jun 9, 2009

peto said:
Your win rate will need to exceed 33% for the 2:1 r/r to produce a positive outcome. Without an edge of some sort (i.e. effectively random entries) it won't because your closer stop will be hit more often than your limit.

Ello Peto,

Most newbies will think that a win rate of +33% will be a walk in the park.

However, If your risking 50 pips for a 100 pip reward the odds of you hitting your target are 2.1 against you. Expect to be wrong twice and correct once out of 3 attempts. As Peto correctly pointed out you would need to be correct +33% of the time with your RvR odds (probably even more than +33%

)

Magican up positive risk v reward ratios all sounds lovely and cosy before you get into a trade.

Much more to trading than RvR

sorry Van Tharp

Andy

Technically Fundamental · Jun 9, 2009

Captain Currency said:
Ello Peto,

Most newbies will think that a win rate of +33% will be a walk in the park.

However, If your risking 50 pips for a 100 pip reward the odds of you hitting your target are 2.1 against you. Expect to be wrong twice and correct once out of 3 attempts. As Peto correctly pointed out you would need to be correct +33% of the time with your RvR odds (probably even more than +33% )

Magican up positive risk v reward ratios all sounds lovely and cosy before you get into a trade.

Much more to trading than RvR sorry Van Tharp

Andy

I'm no pro but I'm inclined to agree. R:R is one of the last things on my tick list of criteria for entering a trade.

Captain Currency · Jun 9, 2009

Here is another figure that "loose traders" may not have yet discovered:

If your system was correct lets say +35% of the time and your risk v reward was positive, 2 Reward for 1 Risk, this would be enough to make you a profitable trader over time.

But you have a 75% chance of getting 8 losing trades in a row within a 50 trade period :-0 with the above "system".

Who reckons that these traders would be looking for the next system after this run of losing trades? I Do

Told Ya, Much more to trading ......

Andy

bbmac · Jun 9, 2009

advfntrader said:
following on from my last post "positive attitude" I've been trying to simplify my thought process right down....

as long as I risk 2% of my account on any trade and ensure that my risk/reward is 2:1 or greater I should be OK in the long run ?...

I mean I'd have to be extremely unlucky to blow my account and have a whole string of losers if I stick to this.

I guess you just have to set the stop / limit and walk away

I refer you to this post/thread: http://www.trade2win.com/boards/first-steps/54890-why-high-probability-trading-so-important.html. At that 33% strike rate (winners as a % of total) it is possible to suffer a losing run of 12 consecutive trades. This would represent 24% drawdown/loss on a/c...are you perpared to deal with this??.... and remember that to recover from only having 74% of your account left requires a 33.3% gain to get a/c back to starting level.

Optimise your overall risk to that you can comfortably tolerate should you suffer a run of losers.

G/L

MrGecko · Jun 9, 2009

Captain Currency said:
But you have a 75% chance of getting 8 losing trades in a row within a 50 trade period :-0 with the above "system".

This kind of thing can prove useful not only for position sizing as per BBMac's (excellent) post linked to above, but also for keeping track of how well your "edge" is actually performing against the expectations; for instance, if your hit rate is supposed to be on the 55 - 60 % bracket, and you get 12 losers in a row, then something urgently needs your attention!

RedGreenBen · Jun 9, 2009

R:R is just one part of what really matters... expectancy. I take some trades with a R:R of 3 and some with a R:R of 1. It's the probability of the target being hit before the stop multiplied by the R:R that determines if they are good trades.

And how do you estimate those probabilities? Well, that's where all the years go

Ben

Technically Fundamental · Jun 9, 2009

RedGreenBen said:
R:R is just one part of what really matters... expectancy. I take some trades with a R:R of 3 and some with a R:R of 1. It's the probability of the target being hit before the stop multiplied by the R:R that determines if they are good trades.

And how do you estimate those probabilities? Well, that's where all the years go

Ben

But how do you work out the probability of the target being hit before the stop? Isn't that impossible to gauge when all the variables are considered?

RedGreenBen · Jun 9, 2009

advfntrader said:
I guess you just have to set the stop / limt and walk away

Sorry to reply in two parts, but I just noticed this line in your post and think it is important.

Because of my obsessive record keeping I was able to compare my profit if I had left the original stop & limit with what actually happened when I 'held the trade's hand'.

The result is that I now spend a lot more time out in the garden! More effort doesn't equal more profit.

Ben

RedGreenBen · Jun 9, 2009

Aaronmalins said:
But how do you work out the probability of the target being hit before the stop? Isn't that impossible to gauge when all the variables are considered?

If it is then consistently profitable trading is impossible. If you can see the chart in terms of probabilities (isn't that what resistance is... an area above which probability decreases?) then you are doing OK.

blancspa · Jun 9, 2009

Hi
I ve been working on automated system for some time already. you ve mentioned here R:R 50:100 points. Will the probability be higher when going for 20 pips every time with 2:1 ratio?

Technically Fundamental · Jun 9, 2009

RedGreenBen said:
If it is then consistently profitable trading is impossible. If you can see the chart in terms of probabilities (isn't that what resistance is... an area above which probability decreases?) then you are doing OK.

I see what you're saying. I understand how the probabilities can be somewhat comprehended from PA on charts but I have just never understood how financial mathematics can quantify these probabilities. That being said I've never studied them so...

RedGreenBen · Jun 9, 2009

Aaronmalins said:
I see what you're saying. I understand how the probabilities can be somewhat comprehended from PA on charts but I have just never understood how financial mathematics can quantify these probabilities. That being said I've never studied them so...

I don't know how they quantify them either, you probably have to get a load of PhDs in one room and pay them a lot of money to produce data with wide error bars

I do though think that 'probability' (for want of a word that covers all these concepts) is probably the key idea to get a grip of to trade succesfully.

Ben

Technically Fundamental · Jun 9, 2009

So what do you use to calculate probability?

RedGreenBen · Jun 9, 2009

blancspa said:
Hi
I ve been working on automated system for some time already. you ve mentioned here R:R 50:100 points. Will the probability be higher when going for 20 pips every time with 2:1 ratio?

I'm not an expert on this, but didn't want you to go answer-less.

Tighter stops/target increases the probability of both being hit, but which way is any bias?! So I think you need to test it and find out with your particular system which produces the more favourable long-term outcome.

Ben

RedGreenBen · Jun 9, 2009

Aaronmalins said:
So what do you use to calculate probability?

I tried the quantitative route and much to my disgust(!) realised that a lot of it is intuition that can only be gained from thousands of hours watching price.

Having said that, I am amazed that people don't do just a very basic analysis like categorising trades by type (e.g. with or against a certain trend) and seeing where the profits and losses come from. I found that my impression of where I was making money wasn't the same as what the cold, hard numbers said.

Ben

Risk / Reward

Established member

Well-known member

Established member

Experienced member

Senior member

Experienced member

Senior member

Experienced member

Veteren member

Senior member

Well-known member

Senior member

Well-known member

Well-known member

Established member

Senior member

Well-known member

Senior member

Well-known member

Well-known member

Similar threads