Risk Reward Ratios?

[davidh1819]

Hello i am in the process of building a trading system and i need some advice on reward risk ratios at the moment i am thinking £3 for every £1 risked. however i feel i need some advice from some experianced traders on this matter

any advice will be much apreciated

 

[Rhody Trader]

Risk/Reward ratios by themselves are meaningless. They need to be considered in conjunction with win%.

 

[wallstreetwarrior87]

If you dont understand the probability of the trade you are taking and why it should be so, then r/r means nothing.

Going for a r/r of 3:1 is no good if there is no chance of your trade moving 3 times the distance as your risk.

There is so much involved in taking a trade beyond a simple concept of r/r.

 

[Trading Fox]

I agree with Rhody Trader risk return is meaningless on its own.

I suggest you have a look at one of Alexander Elders trading books or troll the net for some information about the expectancy concept which is calculated as below.

E = (Avg win $* Win rate[%]) minus (Avg Loss $* Loss rate[%])

A risk reward of 1:10 is only any good if the probably of success is better than 1:10 in effect. So you need to be looking at both the amount of the wins and the proportion of winners.

If you have positive expectancy in your trading strategy you probably have a trading edge.

Henk Vos
Founder ForexTradingProfitSource.com

 

[wallstreetwarrior87]

The bottom line is if you dont know why you are really taking the trade then results will never be better than random.

If a trade has over 75% chance of hitting 1:1 r/r you dont want to take it?

If it has over 50% chance of hitting 2:1 you dont want to take it?

If you dont, then you let so much pass you by. The chance of taking a trade where you can get 3:1 r/r and win consistently is very low unless you have enough experience.

Any seasoned trader will tell you this if they are honest.

All that will happen is you will seriously dent your confidence by seeing trades move into your favour and coming back to stop you out.

What you are trying to achieve is not really going to happen if you admit that you believe markets are totally random.

This concept of random entries, making up pie in the sky risk / reward ratios is fictional.

By all means go ahead and try, I pointed out on another thread people will do what they want anyway.

Im not wanting to sound harsh, but you need to focus on other areas first before worrying about r/r.

ie.What is your trading edge?

Once you have established this ,and proven over time you take the right trades at the right time, then worry about r/r. You will be then in a position to pick which trades you want.

Im not a fan of books about probabilities and expectation because only YOU know why you are taking a trade, and therefor why you expect a market to move to where it does.


Good luck in your endeavors.

 

[JDTRADER]

Risk & Reward

The rule book 3-1

In the real world, protect your entry so get in at the right price. Then aim first for 1-1 and move stops then so on 2-1, 3-1 and let run.

Its all about correct entries and protection just like sex cos if you go in without protection then you risk an oozing loss lol