Is R:R ratio killing my edge?

[blancspa]

If I manage to work out an `edge`, wouldn`t I be profitable with 50% (at worse) probability anyway? Why do I have to have any Risk Reward ratio, or target? I can always trail the price.
I am still not clear about it.

 

[Plaste]

Do some back testing. In my opinion your exit strategy is dependent on your entry strategy. For example you may find a target more usefuel for counter trend trading and a trailing stop more appropriate for trend following.

 

[Rhody Trader]

If I manage to work out an `edge`, wouldn`t I be profitable with 50% (at worse) probability anyway? Why do I have to have any Risk Reward ratio, or target? I can always trail the price.

An edge doesn't necessarily mean better than 50% win rate. I could mean winners being much larger than losers.

 

[jokepie]

Staying in the game is Important...!

If I manage to work out an `edge`, wouldn`t I be profitable with 50% (at worse) probability anyway? Why do I have to have any Risk Reward ratio, or target? I can always trail the price.
I am still not clear about it.

Having a R:R ratio better than 1:1 is very important psychologically and finacially.
You will be confident taking the trade and will stay in until it hits your stop. you will be able to comfortably manage a trade. profits = high probibility + R:R ration,
one of them goes south, you will see fewer profits and smaller.
Imagine this, and may be you already faced this.
your first trade went negative- now you have a big hole
to fill before you can make any profits for the day. next bad trade will put you out of the game,or worse you will be on a 'tilt' - starting to short a trending market.

seems liek you are starting out just like i started few months ago, still i am in the red zone. but trust me. you want to be able to get a handle on R:R. I cant comment on your strategy as i dont know what you trade and how you do it.

hope this helps,

Guru
:clap:

 

[barjon]

If I manage to work out an `edge`, wouldn`t I be profitable with 50% (at worse) probability anyway? Why do I have to have any Risk Reward ratio, or target? I can always trail the price.
I am still not clear about it.

blancspa

Depends what you mean by 50% probability. If you mean there's a 50% probability that the price will move twice as far as your stoploss then you're quids in. If you just mean there's a 50% chance of it moving off in the right direction but resulting in a profit somewhat less than your stoploss then you're not.

good trading

jon

 

[blancspa]

I am still developing my strategy

starting to short a trending market.

well it has to reverse at some point, and I would be looking to get in at the beginning,

I am trying to follow the HH, HL, but its difficult to determine entry point

 

[jokepie]

I am still developing my strategy



well it has to reverse at some point, and I would be looking to get in at the beginning,

I dont know about you - I have had the worst losses on the days that I have tried to get the tops, when the market had popped.
It seems to work well on individual stocks that on futures.
I dont know ...

 

[blancspa]

Because there are two things,
In general I don`t particurarly have a problem managing a trade, actually I quite enjoy it.
I do struggle with determining entry points, start of the trend, I dont use indicators, S/R , Pivot Points don`t work for me somehow.

So I thought than I could trade automated system, while trying to figure the start of the trend: each day determining the range and going for the breakout for 1:1 Risk Reward ratio. But then my hit rate would have to be above 50%. Does that make any sense?

 

[jokepie]

Because there are two things,
In general I don`t particurarly have a problem managing a trade, actually I quite enjoy it.
I do struggle with determining entry points, start of the trend, I dont use indicators, S/R , Pivot Points don`t work for me somehow.

So I thought than I could trade automated system, while trying to figure the start of the trend: each day determining the range and going for the breakout for 1:1 Risk Reward ratio. But then my hit rate would have to be above 50%. Does that make any sense?

I don't have much to say on this strategy - r u day trading this. I would imagine this strategy being lil harsh for a day trader. with fake break outs and multiple tests of S/R.
would kill some one like me.

 

[blancspa]

I don't have much to say on this strategy - r u day trading this. I would imagine this strategy being lil harsh for a day trader. with fake break outs and multiple tests of S/R.
would kill some one like me.

yep, I think you right, could take a lot of time to determine usefulness of this strategy. I thought, if I can calculate everydays `stretch`, the probabilty of the price continuation after ORB could be higher, so going for 10 pip with 10 pip sl and more than 50% hit rate culd do it for me then.

But this is just concept, which does not need to make sense, and if does not I would know opinions.

But my main task is working on determining entry for a nice trend

 

[intradaybill]

If I manage to work out an `edge`, wouldn`t I be profitable with 50% (at worse) probability anyway? Why do I have to have any Risk Reward ratio, or target? I can always trail the price.
I am still not clear about it.

There are three variables that uniquely determine profitability as it is shown in this free paper:

Profitability Rule

- success rate SR
- profit factor PF
- avg. win to avg. loss ratio R

and they are related by this equation (for the derivation read the paper ):

SR = PF/(PF+R)

IF you SR is equal to 50%, you need an R of more than 1 to just break even given slippage and commissions. Obvious but for other values you need the formula.

 

[Chorlton]

If I manage to work out an `edge`, wouldn`t I be profitable with 50% (at worse) probability anyway? Why do I have to have any Risk Reward ratio, or target? I can always trail the price.
I am still not clear about it.

Research Risk Management and "Expectancy"

IMO The edge contributes to a positive expectancy. One can have only around 30% win rate AND still make money. In comparison one can have a high (80% win rate) and still lose money .....

 

[blancspa]

blancspa

Depends what you mean by 50% probability. If you mean there's a 50% probability that the price will move twice as far as your stoploss then you're quids in. If you just mean there's a 50% chance of it moving off in the right direction but resulting in a profit somewhat less than your stoploss then you're not.

good trading

jon

but I am quite struggling with R:R 2:1.
Let`s say after a succesfull entry, trade does not reach 2:1 and pullback and I see my profit vanishes. It is particurarly difficult on higher timeframes. Maybe I shall consider targets instead?

 

[jokepie]

but I am quite struggling with R:R 2:1.
Let`s say after a succesfull entry, trade does not reach 2:1 and pullback and I see my profit vanishes. It is particurarly difficult on higher timeframes. Maybe I shall consider targets instead?

Manging your stop effectively as in manually trail it is on way to boost r:r - I might be wrong here - may be more experience folks can answer this.
:whistling

 

[Vaco]

Blancspa,

You are looking at this the wrong way. R:R, and win should not define your entries and exits, it is merely a statistical overview of your trading.

The market does not know where your entry is, your stop loss or where it has to go for you to reach a 2:1 r:r

And as for win rate you really need at least 1000 trades for this figure to be a true representation.

Instead try to think of the trade set up as

Which way is the market going,

How can I get in on the action,

Where would the market have to go for my view to be wrong.

If you do it this way your stoploss size will fluctuate so the amount you place on each trade will also have to in order to manage risk.

The other option is to have a set stop loss but then you will most likely have to wait for pullbacks on the trend to trade this way.

 

[blancspa]

Blancspa,

You are looking at this the wrong way. R:R, and win should not define your entries and exits, it is merely a statistical overview of your trading.

The market does not know where your entry is, your stop loss or where it has to go for you to reach a 2:1 r:r

And as for win rate you really need at least 1000 trades for this figure to be a true representation.

Instead try to think of the trade set up as

Which way is the market going,

How can I get in on the action,

Where would the market have to go for my view to be wrong.

If you do it this way your stoploss size will fluctuate so the amount you place on each trade will also have to in order to manage risk.

The other option is to have a set stop loss but then you will most likely have to wait for pullbacks on the trend to trade this way.

yes, and that`s the way I seem to be enjoying so far, great help guys, tx

 

[nine]

Manging your stop effectively as in manually trail it is on way to boost r:r - I might be wrong here - may be more experience folks can answer this.
:whistling

To Elefteros,

That's one way. My stop never changes. Same every time. 4-10 times a day.

To Jokepie,

Stops almost ALWAYS reduce the raw return of your system and trailing stops is an excellent way of being picked off when the market naturally retraces some portion of its move forward. Breakeven stops are even more effective as a way of providing liquidity to the predators.

Look up Stridsman's book on system design to understand both how stops reduce return and why one should use them anyway.

 

[Chorlton]

To Elefteros,

That's one way. My stop never changes. Same every time. 4-10 times a day.

To Jokepie,

Stops almost ALWAYS reduce the raw return of your system and trailing stops is an excellent way of being picked off when the market naturally retraces some portion of its move forward. Breakeven stops are even more effective as a way of providing liquidity to the predators.

Look up Stridsman's book on system design to understand both how stops reduce return and why one should use them anyway.

My 2 cents.

Stops (as used to mininise a loss) always effect the Net return of a System so totally agree with this. However, the implementation of Break-Even stops is IMO debatable. From a pure "logically' standpoint, the use of them would make perfect sense. But trading is not always "logically" IMO !!!

From my own testing on my systems, the use of Break-Even stops does nothing to improve them. Instead they increase MaxDD and reduce overall Net Profit.

However, this is not to say that they are not effective with other strategies. The Key is to test them out before blindly implementing them to ensure they offer an edge.

 

[blancspa]

My entry was at 1.3994 - on wednesday. I put a s/l below resistance and previous low at 1.3897. Price went up to 1.4059, then back again almost hitting my s/l, rebounded and up again. After break 2nd resistance I moved my s/l to 1.4087, securing 100 points profit. I have been quite lucky with this one as the price pulled back just 1 point away from my s/l.
Evenyually, price will move higher and hit my target at 1.4193. In other scenario I will move s/l again or just wait when it hits the target.
Well this trade is develping quite nicely so far, yet sometimes price pulls back below previous low making bigger swing, and comes back up hitting my s/l.
Is there any way out of it?

 

[Chorlton]

My entry was at 1.3994 - on wednesday. I put a s/l below resistance and previous low at 1.3897. Price went up to 1.4059, then back again almost hitting my s/l, rebounded and up again. After break 2nd resistance I moved my s/l to 1.4087, securing 100 points profit. I have been quite lucky with this one as the price pulled back just 1 point away from my s/l.
Evenyually, price will move higher and hit my target at 1.4193. In other scenario I will move s/l again or just wait when it hits the target.
Well this trade is develping quite nicely so far, yet sometimes price pulls back below previous low making bigger swing, and comes back up hitting my s/l.
Is there any way out of it?

Widen your stop.

Stop placement is a fine balance. You have to find a place which offers a good compromise between giving away too much profit (wider stop) and being stopped out prematurely (tighter stop). There is no perfect solution.

One other point. Why are you using a Target Stop?