Risk Reward Myth

[Jason101]

Scaling in or scaling out, or both? Personally I don't like either, but I'm aware many people do. Scaling out seems to be the more popular.

I can not relax until I have some profit secured.

Once I have started to scale out I have a warm comfortable feeling inside.

 

[Harry Sanborne]

Who has the BEST chance of success A or B or C or D? All players have £1,000/ $1,000 in account.

A. Short on DOW with Stop Loss at 25% account risk.

B. Short on FOREX with stop Loss at 25% account risk .

C. Short on GOLD with Stop Loss at 25% account risk.

D. Short PUT/CALL DOTM on OIL with Stop Loss at 25% account risk.

Please place in order of choice on all 4. [ Leave out "D" if you are not sure on options.
========================================


Who is more likely to go bust FIRST if they continue the strategy with same % on stop loss A, B or C or D?

Please place in order of choice on all 4 or on 3

 

[andycon]

I can not relax until I have some profit secured.

Once I have started to scale out I have a warm comfortable feeling inside.

My concern with scaling out is you are basically cutting some some of your profits short.

 

[Atilla]

My concern with scaling out is you are basically cutting some some of your profits short.

Can it not also be considered managing the trade - as I like to think of it. Also - trailing SL I think of as trade management etc...

I have struggled with it must confess - but on this demo have left it out. All trades are limit orders. There were quite a few that were in profit and subsequently that got stopped out.


I will have some time in my hands hopefully in the next two weeks and plan to open three demo accounts. (Will leave existing Risk1-Reward2 account as is Currently 1.3K in profit after 7 weeks - 2.6% return).


R1/R1
R1/R2
R1/R3

Will place identical trades on Sunday evening for all 6 pairs of currencies and see how they perform.

Using same BB breakout placing two pairs of trades with identical SL & Limits based on BBs.

Hope to put it on Excel and evaluate stats.

Will be looking at performance in the three demo accounts with respect to;

1. TimeFrame
2. % BB as oppposed to previous range ie 5,8,13 periods (No idea re: what to pick so Fib numbers seem a good starting point). May put 10 in there too as it seems to be significant with candlesticks as a turning point.
3. % breakout based on BB range.

 

[Jason101]

My concern with scaling out is you are basically cutting some some of your profits short.

This is the so the opposite for me, scaling out stops me from cutting profits short. If I am all out at once I feel fear on a miner retracement and exit to early!

Or I get greedy and say to myself, it’s only a minor retracement and hold it back down to break even!!

 

[Jason101]

Can it not also be considered managing the trade - as I like to think of it. Also - trailing SL I think of as trade management etc...

Ahh, when I scale out I am physically tightening up my stop to a within a whisker.

So if my trade management is on say a 4h t/f my scaling out will consist of a percentage of the trade having its stop moved to a 15m t/f stop.

 

[jolynnforex]

No matter what risk/reward ratio you have. For me it is always important to develop a winning system with at least 60% winning rates. Otherwise you will get frustrated.

 

[HowardCohodas]

No matter what risk/reward ratio you have. For me it is always important to develop a winning system with at least 60% winning rates. Otherwise you will get frustrated.

There are many trading personalities. Some can tolerate a low-win rate high-return strategy, some cannot. As long as there is a positive expectation, there are many that will accept all combinations of win rate and win size.

 

[Atilla]

Placed following 6 demo trades as below - based on 1hr charts.

Risk 1 Pair Direction Limit Order Stop Target
Reward GBPUSD Long 1.63300 1.62600 1.64000
1 GBPUSD Short 1.62600 1.63300 1.61900

Reward GBPUSD Long 1.63300 1.62600 1.64700
2 GBPUSD Short 1.62600 1.63300 1.61200

Reward GBPUSD Long 1.63300 1.62600 1.65400
3 GBPUSD Short 1.62600 1.63300 1.60500


We'll see how the trades pan out...

The XLS cut and paste loses tabulation - sorry about presentation...

 

[ronblack]

There are many trading personalities. Some can tolerate a low-win rate high-return strategy, some cannot. As long as there is a positive expectation, there are many that will accept all combinations of win rate and win size.

True but positive expectation is far from enough to make you profitable. I have met many traders with positive expectation that got ruined eventually.

I would like that you think about situations when there is positive expectation, yet the trader is ruined. Can you think of an example?

 

[Pat494]

Interesting article

 

[JohnnyForex]

You may want to augment your provenance with this site by mentioning the nature of Fudgestain’s off-site activities and why when Mr. Marcus blew the whistle on him he disappeared forever.

Bumping an old thread as I was reading older posts.

It looks like TheBramble is no longer active, but I was wondering if anyone had any more information on Fudgestain or Hoodoo Man (Blotto on ET?)?

The reason I'm asking is that I'm a big fan of the posts by Cheese on ET, which I understand is Fudgestain (have not yet read his posts here) on this site, but I've always had the feeling that what he wrote were too good to be true.

So, I'm wondering if anyone know what this was all about and what Fudgestain's off-site activities were.

Thanks in advance.

 

[numbertea]

Biggest risk/reward blunder I ever made was not factoring in a finger fumble on the keyboard. Truth is that you can estimate your risk/reward ratio but you can never fully account for the risk. This may sound useless but I would say that common sense and a trading plan that increases your account is more important than calculating risk/reward ratios. IMHO. If I felt I had to super tightly determine this ratio I would rethink my trading plan first.

Cheers

 

[JohnnyForex]

Bumping an old thread as I was reading older posts.

It looks like TheBramble is no longer active, but I was wondering if anyone had any more information on Fudgestain or Hoodoo Man (Blotto on ET?)?

The reason I'm asking is that I'm a big fan of the posts by Cheese on ET, which I understand is Fudgestain (have not yet read his posts here) on this site, but I've always had the feeling that what he wrote were too good to be true.

So, I'm wondering if anyone know what this was all about and what Fudgestain's off-site activities were.

Thanks in advance.

Bumping this again.

I have to say I found his posts interesting and thought provoking.

 

[JohnnyForex]

Bumping this again.

I have to say I found his posts interesting and thought provoking.

Final bump!

A big fan of Cheese and Fudgestain. No knowledge of Blotto/Hoodoo Man.

Could anyone enlighten me as to what Fudgestains off-site activities were? Same with Hoodo, really.

PM if better.

Thanks in advance.

 

[Pat494]

Final bump!

A big fan of Cheese and Fudgestain. No knowledge of Blotto/Hoodoo Man.

Could anyone enlighten me as to what Fudgestains off-site activities were? Same with Hoodo, really.

PM if better.

Thanks in advance.

Can't say I have ever heard of them. So why not post some of their gems of wisdom ?

 

[DionysusToast]

Hi all,

I just thought I'd raise this (maybe controversial) point. All new traders are taught have your winners bigger than your losers. Thats fine, im not saying this is wrong, but I feel the logic is flawed.

The argument supporting this is you are rewarded twice as much for every time you are right (in a 1:2 risk reward example). However this implies your odds of having a winning trade are 50/50. They are not.

Assuming no slippage and commission (an ideal world) and you have a 1:1 risk reward profile the odds of you winning are 50%. You can flip a coin randomly in the market and you would win 50% of the time. After a couple of hundred trades flipping a coin you would be break even on ticks (again assuming no trading costs).

HOWEVER, if you risk 1 to make 2 the odds are not 50/50 because you are expecting the market to move twice as far in your favour to make a profit. To use the coin example again, 1:1 risk reward is a 0.5% chance of winning. However a 1:2 risk reward the odds of you winning are 0.5 x 0.5 = 0.25% chance of winning.

So again if we were to trade randomly following a strict risk reward of 1:2 (with no slippage and commissions) and you entered long on heads with a target of 12 ticks and a stop of 6 ticks (and vice versa) after a couple of hundred "spins" you would have won about 25% of the time and be about flat on ticks.

So, lessons I feel can be learned, if you are a new trader provided you stick with exactly the same risk reward profile on every trade (so the probabilities balance out) you do not have to have winners bigger than your losers. You will not make anymore money but I feel it is easier to stick to a plan that results in a winner every other trade than one that results in a winner every third trade. It will help confidence.

Also, this does not teach you how to have an "edge" in the market, thats up to you, but with a consistent risk:reward profile and consistent position sizing even random trading can keep you from quick blow outs.

Of course we have trading costs, so a 1:1 risk reward in theory is 50%, but after costs its more like 45% expectancy. Hence this is a negative sum game. However, if after years of studying the markets you can improve on randomness by 6% (not sure how this is expressed in mathematical terms) you now have a positive expectancy and are a profitable trader!

Please feel free to correct me if I am wrong, just highlighting its about expectancy not risk:reward which is where most people start (and stop) their learning. The greater your risk: reward ratio the lower your win rates will be. Why harp on about the risk 1 to make 3 all the time?

I know a market maker whose stats are:

85% wins
10% scratch
5% losses

Much of the time he's in the market for less than 10 seconds. The majority of the time he's looking for a tick.

A trade against is quite often more than his 1 tick target.

So yes - there is no law that says risk less than your target.

 

[J_C_Anderson]

For sure, risk rewrard ratio is extremely important. If your strategy has poor risk reward ratio, it can cause losses even if the win rate would be perfect. To check the risk reward ratio of your strategies you can use special tools for backtesting like Forex Tester. It will provide you with the results of possible performance of the strategy in long term perspective.

Optimal RR for daytrading is at least 1/2 - 1/3, for swing trades - 1/5 to 1/10, but, again, it all depends on your strategy.

 

[FXX]

Risk reward is a myth. You cannot know how much the market will give you so how can you possibly define a ratio beforehand. The end result is an account that is chewed away gradually as the ratio is not met on a sizeable portion of trades.

Don't apply risk reward, you are wasting your time and inflicting a false sense of security

 

[JohnnyForex]

TheBramble said:
You may want to augment your provenance with this site by mentioning the nature of Fudgestain’s off-site activities and why when Mr. Marcus blew the whistle on him he disappeared forever.

Bumping an old thread as I was reading older posts.

It looks like TheBramble is no longer active, but I was wondering if anyone had any more information on Fudgestain or Hoodoo Man (Blotto on ET?)?

The reason I'm asking is that I'm a big fan of the posts by Cheese on ET, which I understand is Fudgestain (have not yet read his posts here) on this site, but I've always had the feeling that what he wrote were too good to be true.

So, I'm wondering if anyone know what this was all about and what Fudgestain's off-site activities were.

Thanks in advance.

Bumping!