Risk Reward Myth

BearBull Trading

Junior member
In my opinion statements like "only take trades with minimum Risk:Reward of x " is nonsense. On entering a trade I only know where my "fixed disaster stop" is. The market & exit is dynamic & changes tick by tick. After entering, the "reason" to exit may come at 1 tick or 1000 ticks - the market decides the profit opportunity, not some mythical number a trader is hoping for.
 
Trading is math. End of story.

I just read a thread where people were in agreement that one should only trade the higher timeframes to avoid noise.

This is a "need to be right mentality".

Can't see the wood for the trees.

I believe that trade frequency is far more important.

A person taking single large position sizes at 40% WR and 2:1 if taking 2 trades a day will make far more money than somebody with 50% at 3:1 if they are only taking a trade a week and sitting in multiple trades (portfolio heat) for weeks.*.

Just my opinion.
 

ffsear

Senior member
Risk reward is important for me because I have targets in the market. If stop/target is less than 3 then I won't take the trade in the first place. Obviously, trades won't always work that way,. but picking 1:1 trades will simply erode my edge down to nothing.
 
Risk reward is important for me because I have targets in the market. If stop/target is less than 3 then I won't take the trade in the first place. Obviously, trades won't always work that way,. but picking 1:1 trades will simply erode my edge down to nothing.

Fair point.

I believe that if you have a valid way of recognizing 1:3 trades and the discipline to taking only those you can be well off. It's pretty much "Cut your losses short and let your winners run."

Sadly, most seem to cut their winners short and let their losses run. No wonder most people lose.
 

tomorton

Legendary member
I'm an optimist by nature. I believe (irrationally) that I have more than average good luck.

But when it comes to trading I find its healthy to assume all your key performance indicators are actually rather poor. Amazingly, if you have a profitable strategy and stick to it, you will come out well ahead. You certainly don't need to actively seek a way to push r:r or win rate or trade frequency or even account capital. But it will just take about 7 years of trading.
 

wmram

Member
If you are going to make it in this business (speculative risk), it's essential that you make noticeably more than you lose.
A positive traders' equation is a must have. Are there exceptions? Perhaps but they are exceptions. A positive traders' equation is the path to success for traders; you're playing numbers game in a leveraged environment. This isn't a game of precision entries and exits.
 
Big edges are hard to find.
Better to have a small trading edge that can be executed frequently.

$100k account
Risk:Reward 1:1
Win rate: 55%
50 Trades per month
2% Risk per trade
27.5 Winners = $55000
22.5 Loser= -$45000
Net monthly gain = $10000 ie 10%.


Aiming for 2:1R 3:1R 5:R will not only take a long time to collect data, but also leads to risk of ditching strategy before law of large numbers can play out.

No matter where you are in the trade, there is around just as much chance of price moving 1R for you as against you.
So 'letting your winners run' is a flawed way of thinking. Find out where there is slight skew eg momentum, pullback. Then execute, execute, execute.
 
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tomorton

Legendary member
Big edges are hard to find.
Better to have a small trading edge that can be executed frequently.

$100k account
Risk:Reward 1:1
Win rate: 55%
50 Trades per month
2% Risk per trade
27.5 Winners = $55000
22.5 Loser= -$45000
Net monthly gain = $10000 ie 10%.


Aiming for 2:1R 3:1R 5:R will not only take a long time to collect data, but also leads to risk of ditching strategy before law of large numbers can play out.

No matter where you are in the trade, there is around just as much chance of price moving 1R for you as against you.
So 'letting your winners run' is a flawed way of thinking. Find out where there is slight skew eg momentum, pullback. Then execute, execute, execute.
This is good stuff. Too many traders base their trade management on the performance indicators they aspire to, rather than the inherent structures of the strategy.
 
This is good stuff. Too many traders base their trade management on the performance indicators they aspire to, rather than the inherent structures of the strategy.
Thanks. I struggled over the years. I noticed that the more I try, the tougher trading becomes. Then I simplified what profitable trading is (to me). It's about having a very small edge, consistent repetition and no short term expectations.
 
 
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