Risk Reward Ratio

DaveGos

Active member
100 1
I wonder if anyone could give me some pointers regarding the reward part of the Risk/Reward ratio. I am aiming on each trade to apply a minimum 3:1 ratio. Now the risk part is fairly simple because it links directly to Risk Management levels and the support level. However I cannot see how I can evaluate the reward part of the ratio as the upper price has yet to be established by the Market. I trade intra-day which may be why I'm having these problems.

David
 

Skimbleshanks

1
2,325 16
The Reward part is usually worked out using a) support and resistance areas, and b) targets worked out on patterns such as triangles and pennants.

Not sure what you already know, but when a stock moves down the bounce points (support) often turn into resistance points on the way back up.

So just look for worst case scenarios to work out the reward targets, and then you should be pleasantly suprised when the price thunders through those points and you end up with a better than 3:1 ratio. Or alternatively, you could exit your position at those points rather than waiting for a turn.
 

Mr. Charts

Legendary member
7,367 1,184
There are very many ways of working out r/r. In a fast moving intra-day market do set a "take profits" level where you are looking to scale out part or all of your position and move a trailing stop up at the same time if you only close, say, half your trade.
Also remember that it is all very well having a r/r of 3:1, but you must judge the probability of those parameters being hit. Obviously if there is only a 30% chance of the profit target being
reached and a 70% chance of a loss, that rather upsets your initial r/r assessment.
It always amazes me that so few people actually assess the probability of success properly.
 

DaveGos

Active member
100 1
Thank's Mr Charts. It's the probability of success in hitting a target that I'm having problems with. If anything I try and be very conservative when looking at the potential reward. But even with this target I have no way of judging the likely hood of this target being reached. I guess it will probably come with more experience. Skimbleshanks I think the same probably applies to Resistance, experience will tell in the end.
 

Skimbleshanks

1
2,325 16
Yes, you're right Dave - I just didn't want to go into it too deeply as I thought you probably realised all about support and resistance. :D
 

Mr. Charts

Legendary member
7,367 1,184
Dave,
Are you trading UK or US intraday? US is much easier.
If the UK, then you're on a hiding to nothing unless you're scalping. Please re-read the last sentence, it will save you money and heartache if you take notice.
Check out the normal range in the share you're trading, and the normal moves AND within your time frame. You will start to get a feel for the extent of likely moves.
HTH
 

DaveGos

Active member
100 1
Mr Charts

I'm currently trading intra-day FTSE, infact I'm concentrating on a single stock. I've only been trading full time for just over a month. I average £500 a week a profit but am aware that my control of risk is to tight which means that the criteria I set for an entry is not met 50% of the time so I spend a lot of days out of the market. I take your point re the USA and will almost certainly switch over once I am comfortable with my trading style and system. I guess dealing with a share and a market I know is within my comfort level at the moment. However if nothing else tax will move me, is trading the most taxed occupation in Britain, does anybody else get taxed three times on the same income ( Stamp duty, Capital Gains and Income Tax ).
Still hopefully if I can make a profit within this tax regime trading US stocks profitably should be a litle easier.

David
 

Mr. Charts

Legendary member
7,367 1,184
.........and death duties. I'm tired of being subjected to GBH - Gordon Brown's Horrors.
Have a look at the US. You don't have to be familiar with their companies. They are merely trading instruments. Just like VOD, LLOY etc.
For example I was trading MXIM y'day and a 1000 share tranche worth $39100 cost me $17.50 in fees. No stamp duty etc.
And so easy compared to UK shares.
If you want me to put a chart up, say so.
 

be-positive

Veteren member
4,969 488
Good afternoon Mr Charts,
If you want me to put a chart up, say so.
This member would be very grateful if you could find the time to post a chart of yesterdays MXIM trade. (if possible the time you entered and the time you closed)
THANKS IN ADVANCE
 

warm_machine

Member
70 0
risk/reward

I think your expectancy level has a lot to do with what level of risk reward will keep you ahead. For example a risk reward of 1 to 5, where the later is risk, is entirely acceptable if your expectancy level is greater than 80%. High risk to reward ratios are quite common eg. certain hedged positions can be an example, given that there is never a perfect hedge.
 

DaveGos

Active member
100 1
Mr Charts

Thanks for the chart, you can certainly take a profit at much smaller margins when the first .5% ( plus the spread ) isn't taken up paying the tax.
 

Mr. Charts

Legendary member
7,367 1,184
The spread is normally 1 cent on MXIM and you can sometimes buy on the bid and sell on the offer anyway!
 

Naz

Experienced member
1,391 22
Trading the US is so much easier.Although many will disagree.In the beginning the stocks are unknown to you.However as mentioned above in this thread they are merely trading instruments.

If you look at the Nasdaq 100 there are an amazing amount of good liquidity stocks that exhibit decent intra day moves for the short term trader to profit from.Tight spreads,low commission fees,free level 2 direct access software from your broker,no stamp duty and no one mucking around with any bias.

If you were in a normal business you'd check out the competition and go for the best deal,trading is a business and for me the best deal is in the US.
 
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