Acceptable Risk/Reward Ratios and Managing Multiple Contracts

Hi Guys,

I'm Sam and am training with a prop house, still on the sim and have just started trading more than one contract.

I'd like to learn of your views concerning questions of risk/reward ratios, and managing trades with multiple contracts.

I've found conventional wisdom tends to preach a minimum risk:reward ratio of 1:3, though I found that I was getting stopped out of a number of winning trades though this technique. What views?

Further what views are there regarding trading more than 1 contract. So far I've been entering at one level with 2 contracts and taking them off at different intervals in the trade, allowing me to lock in profit and protect losses. Of course the corollary to this is that margin for error diminishes significantly since obviously losing trades show magnified losses.

Look forward to hearing your views,

Happy trading,
Sammy x

sammythescalper said:

I've found conventional wisdom tends to preach a minimum risk:reward ratio of 1:3, though I found that I was getting stopped out of a number of winning trades though this technique. What views?

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Sounds to me like your looking first at how much you could make then backing out a stop level rather than placing your stop at a level determined based on your strategy.

Rhody Trader said:

Sounds to me like your looking first at how much you could make then backing out a stop level rather than placing your stop at a level determined based on your strategy.

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Thank you for your response. I look at my target/s and entry and determine a stop based upon that criteria.

Do you think that is a flawed approach?

Thanks,
Sammy

Yes, because if you just say my target profit for this is X points and set your stop as being X/3 in the opposite direction you are not accounting for market volatility. That means more than likely you are ending up with a stop that is too close to the market and as a result will tend to get hit by normal price movement. That's likely why you're getting stopped out so much on trades that would have worked out.

I use a minimum of a 50 to 1 risk/ reward.

@ Mr Forman,

thanks a bundle - that has made all the difference to my game. My focus has shifted more to getting better entries and win % rather than where my stop should be. Arguably the best placed trades don't even need a stop under normal conditions. The stop is there merely to prevent a 'microcosmic black swan' event from wrecking your position. I.e. Unexpected news. A fine example is a few weeks back when I was in a bread and butter short in the S&P e mini, had just booked profit with one contract and protected losses with the other when breaking news of BP capping the oil spill caused a sudden rally.

Goin live next week so majorly excited. Any tips for the transition? Hey if you're ever in the UK would like to treat you to a pint!!,

cheers,
Sammy.

@ Fantastic 4 - so you have a 1 tick stop for 50 ticks profit?! That sounds absurd!

Risk Reward is important, but if your system is crap, which 9/10 times it is, no reward level will revive it.

sammythescalper said:

thanks a bundle - that has made all the difference to my game. My focus has shifted more to getting better entries and win % rather than where my stop should be. Arguably the best placed trades don't even need a stop under normal conditions. The stop is there merely to prevent a 'microcosmic black swan' event from wrecking your position.

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Two things.

First, don't get caught up with win%. It's only one part of your performance. High win % systems can be poor performers and low win% systems can be very good performers.

Second, I do not use a "stop loss". My stop is my "if the market goes here most likely it's not going to do what I thought" level. In other words, it's not my protection against an outsized loss, but rather my exit-if-wrong point. From this perspective, your interpretation of what I said is completely wrong. I look at the risk (stop point) for the trade and the upside potential both, and guage if taking the trade make sense from a probability and risk/reward perspective.

Right,

Well I seem to have found a discretionary system which to date is working very well. It just so happens to be where I seem to make a very high percentage of winners. I fully take your points on board, however believe a stop is necessary in case of any significant breaking news that can cause a significant move in the other direction, and thanks to your input in tandem with more experience I am far better at choosing a level where to place it, whereas before I was just putting it at a fixed ratio - which now appears blatantly stupid. I figure the magnitude of my winners justify having far wider stops than previous.

May I ask what your personal daily targets off 2 contracts on the E mini S&P would be? I'm hitting 400-500 with complete ease, however want to firstly translate this to live and then, consolidate with a few solid weeks and increase both targets and lot size, in that order, thereafter.

Thanks again for your input.
Do you have a book?

In other words I'm not one of those 'inverse rare event traders', as Taleb puts it, but the opposite in the respect that I make 8-15 ticks a time at a high magnitude and lose 5-10 relatively infrequently. I also think that the application of discipline of this method ought to prevent ruin. What are your thoughts?
cheers

Correction - 8-15 ticks at a high frequency as compared to 5-10 at a much lower frequency.(Not magnitude). The trades I am placing at the moment all seem to be working like clockwork, though one is of course wary of not getting too excited

If you're taking tiny trades like this, and presumably working at least one of entry/exit if not both in the book then in reality you'll find the markets are relatively mean reverting most of the time... a larger risk than reward is not unreasonable... noise will help you out