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What's your TP? Fixed reward vs dynamic reward 5 replies

Rationale behind "Risk Per Trade" and "Risk/Reward Ratio"? 8 replies

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Attachments: 1:1 Risk/Reward Frowned Upon?
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1:1 Risk/Reward Frowned Upon?

While so many new traders search for the holy grail trading strategy and use tons of TA tools and analytics, they fail to realise RR and money management are key to trading profitability. I agree with Winston that if you aren't employing an RR related strategy, there's no way to be profitable in long term. Given the market's unpredictability, high strike rate (70% or more profitable trades) in the long run, cannot be sustainable. If combined with a low RR, is not going to generate healthy profits.
Quoting BWilliam
{quote} The casinos rake in billions with this 2.7% house edge without micro-managing money management for every spin of their thousands of roulette tables except setting table limits to define their risk exposure. Think about that.
Sorry but he casinos use the most strict of money management/R:R. That's why they place limitations at the various gambling sites. There are always rules that gamblers must follow that limit their ability to win and this is why the casinos always win.
Quoting Winston Reed
{quote} LOL. R:R cannot be separated from win rate. The win rate determines if your R:R is profitable. You can ignore R:R all you want. It's there whether you realize it or not. The conscious decision to control it is the difference.
yes i understand what you mean
  • Post #24
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  • Edited 10:39pm Feb 4, 2021 10:21pm | Edited 10:39pm
Quoting Winston Reed
Sorry but he casinos use the most strict of money management/R:R. That's why they place limitations at the various gambling sites. There are always rules that gamblers must follow that limit their ability to win and this is why the casinos always win.
First time I read the casinos micro-manage every spin risk reward R:R.

Btw the table limits are there not to limit the gambler's ability to win. It's purpose is to limit the casinos risk exposure. This table limits is not why casinos always win.
Trade the value
Quoting Winston Reed
{quote} It's interesting how people presented with clear facts and logic still question the veracity of R:R and insist "that a skilled trader can make money in the market with just about any R/R ratio." It is impossible.
I think you're missing what I'm saying. I by no means am saying having a larger R:R is a bad thing or even less profitable. The fact is that 99% of the trading teaching material preaches exactly what you're saying but 90% of traders fail. Of course psychology plays a role but to a larger extent I believe it's the system they are attempting to trade. I'm also speaking to the general neglect in the trading community towards a 1:1 RR. If I said I could year in and year out consistently hit 55% on the S&P500 futures contract while getting around 20 trades a week, that's a year end 100% profit plus or minus a couple percentage points before commissions. However it seems that most people in the trading community have the opinion that 55% hit rate for 1:1 isn't good enough
Setting the Risk:Reward is just choosing a ratio, which is the easy part...Risk/Reward by itself is meaningless, without knowing your actual probability of success per trade.

1Risk: 2Reward is immensely profitable if your win rate is 50%, but whether or not your WR really is 50% is the question, isn't it?

Conversely, a 1:Risk : 2:Reward is unprofitable if you only have, say, a 20% chance to win per trade.

If the probability of going up/down is really just 50%, then you're still not profitable just because you 'choose' to risk 1%, and aim for 2%, because going up 2 units is 25% chance, based on 50%Up x 50%Up.
Quoting Brandon65
Setting the Risk:Reward is just choosing a ratio, which is the easy part...Risk/Reward by itself is meaningless, without knowing your actual probability of success per trade. 1Risk: 2Reward is immensely profitable if your win rate is 50%, but whether or not your WR really is 50% is the question, isn't it? Conversely, a 1:Risk : 2:Reward is unprofitable if you only have, say, a 20% chance to win per trade. If the probability of going up/down is really just 50%, then you're still not profitable just because you 'choose' to risk 1%, and aim for 2%,...
With no edge, the probability of success for 1:1 RR is 50%, for 1:2RR is 25%.

The account statistics that show up profit does not naturally mean there's edge. Say over 10years data it may mean there's an edge because the chi test reject the null hypothesis, that means not due to luck. But the trader only know that after 10years of trading data. Meantime trader don't know along the way towards 10years.
Trade the value
Quoting BWilliam
{quote} With no edge, the probability of success for 1:1 RR is 50%, for 1:2RR is 25%. The account statistics that show up profit does not naturally mean there's edge. Say over 10years data it may mean there's an edge because the chi test reject the null hypothesis, that means not due to luck. But the trader only know that after 10years of trading data. Meantime trader don't know along the way towards 10years.
Agreed. However I must contest the arbitrary amount of data chosen, whereas I think it's not the amount of data in years, but the total "instances", in this case, trades, analyzed. If your system only shows, as an example, 10 trades over 10 years, effectively averaging 1 trade/year, then it's still a small sample size.
Quoting Brandon65
Setting the Risk:Reward is just choosing a ratio, which is the easy part...Risk/Reward by itself is meaningless, without knowing your actual probability of success per trade. 1Risk: 2Reward is immensely profitable if your win rate is 50%, but whether or not your WR really is 50% is the question, isn't it? Conversely, a 1:Risk : 2:Reward is unprofitable if you only have, say, a 20% chance to win per trade. If the probability of going up/down is really just 50%, then you're still not profitable just because you 'choose' to risk 1%, and aim for 2%,...
Probability is not the same as R:R and in trading it seems it is highly subjective and frankly not needed. One can absolutely decide one's R:R and determine within one's defined analysis and strategy which trade one thinks will provide 3:1 and then trade as such. I only take trades that I think will achieve 3:1 and I do so religiously. I use market structure to determine which trades I think will satisfy my 3:1 requirement and I do it without a clue what the probability of the trade might be. I have no idea of the probability of success with my trade and I doubt anyone else would know such a probability. My personal win rate fluctuates between 30-50% and it is because of 3:1 or higher (sometimes I go 4:1 - 5:1) that I am profitable. If I was doing 1:1 or perhaps even 2:1 I would be much less profitable if not at breakeven or eroding my account. I track every trade and know exactly my win rate at any given time. More recently it is a bit higher but never >50%.
Quoting Winston Reed
{quote} Probability is not the same as R:R and in trading it seems it is highly subjective and frankly not needed. One can absolutely decide one's R:R and determine within one's defined analysis and strategy which trade one thinks will provide 3:1 and then trade as such. I only take trades that I think will achieve 3:1 and I do so religiously. I use market structure to determine which trades I think will satisfy my 3:1 requirement and I do it without a clue what the probability of the trade might be. I have no idea of the probability of success...
I agree with you! One can decide their R:R, it's as simple as this: Enter trade, set stop loss at -10, and setting take profit at 30 pips profit.

But I can do that if I just entered forex an hour ago, never having placed a trade in my life. Therefore, that itself isn't enough to ascertain that I have a positive skew in profitability, just because I arbitrarily decided to take profit at 3x my risk, right?

Therefore I'm inclined to believe you'd agree that's why it's important to know one's win rate. I'm not a professional, but I see people always telling others to "set their R:R to 1:2, 1:3, etc" without going through an analysis of whether that system/trading method actually allows produces a win rate that makes 1:2, or 1:3 profitable.
Quoting Winston Reed
{quote} Just do the math. 99% lose because they do not have follow sound money management but instead believe in what I think is the myth: an edge. My edge is R:R. My trading strategy is not rocket science. No secret indicator or combo of indicators. Just sound analysis which by the way involves trading with the trend most of the time. All my trades are planned with profit target and protective stop loss placed at the time of the trade entry. Once entered I do not intervene. It must hit my profit target or my stop loss. I can't tell you the satisfaction...
Totally agree, do you adjust risk at anytime by moving stops to BE? I employ the same RM however, i move stops to break even once price crosses 1.5R as i personally can't stomach taking a loss on a trade which already offered some good profit. Only shortfall of SL to B.E is price would occasionally stop one out only to continue to target. The challenge is finding the sweet spot.


On this subject, i think it all depends on your estimated win rate and trade frequency. Do you find signals often and do you win on those set ups 60-80% of the time? then by all means you would do really well with 1:1 targets. But if you have a win rate of 55% or less, taking profits at only 1r will set you up for failure or at the very best very mediocre trading gains if any in the long run.
Quoting Brandon65
{quote} I agree with you! One can decide their R:R, it's as simple as this: Enter trade, set stop loss at -10, and setting take profit at 30 pips profit. But I can do that if I just entered forex an hour ago, never having placed a trade in my life. Therefore, that itself isn't enough to ascertain that I have a positive skew in profitability, just because I arbitrarily decided to take profit at 3x my risk, right? Therefore I'm inclined to believe you'd agree that's why it's important to know one's win rate. I'm not a professional, but I see people...

Spot on!. The two sides of the equation = Win rate & R:R
  • Post #33
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  • Edited 2:16am Feb 5, 2021 1:58am | Edited 2:16am
Quoting Brandon65
I agree with you! One can decide their R:R, it's as simple as this: Enter trade, set stop loss at -10, and setting take profit at 30 pips profit. But I can do that if I just entered forex an hour ago, never having placed a trade in my life. Therefore, that itself isn't enough to ascertain that I have a positive skew in profitability, just because I arbitrarily decided to take profit at 3x my risk, right? Therefore I'm inclined to believe you'd agree that's why it's important to know one's win rate. I'm not a professional, but I see people...
Most traders trade discretionary system. So each trade is different. It's not possible to objectively quantify this win rate doing history testing. So the only useful data is from their real live trades. This means that it takes a long time before cumulating a large enough sample size of statistical significance. Therefore such traders are expressing their opinion based on extrapolation from whatever data available today with the assumption that their system metrics, performance, the market and all other relevant factors remain the same.
Trade the value
I guess, because it is what they have teached from brokers and any other resourse they find on the net. For me 55% is an advantage, but you know that this advantage drops in the end, so everyone looks for safety and chooses bigger rewards so at least can break even in the end, because many things can go wrong with their psychology and many bad things might happen in an economy too. You may not be resilient in the future, so a better reward is wiser.
Looking for profitable short term trades ...|
The fib tool is an excellent way to mark out stoploss, entry and Take Profit targets.

This will enable you to plan out your trade beforehand, your entry & stoploss placement is critical in defining your possible take profits.
Also by doing this you not only know when to take profits but also observe market structure to give you the best target to aim for.

Without a target, you will obviously miss it.
The Only Limit, is the One that you Set Yourself - Felix Baumgartner
The simplest way to explain this is, IMO, using the Moving Average crossover strategy. You'll find more losses than wins with this strategy, but the wins with a 1:3 RRR will net you profit even if the winning rate is only 40%.
Quoting Brandon65
{quote} I agree with you! One can decide their R:R, it's as simple as this: Enter trade, set stop loss at -10, and setting take profit at 30 pips profit. But I can do that if I just entered forex an hour ago, never having placed a trade in my life. Therefore, that itself isn't enough to ascertain that I have a positive skew in profitability, just because I arbitrarily decided to take profit at 3x my risk, right? Therefore I'm inclined to believe you'd agree that's why it's important to know one's win rate. I'm not a professional, but I see people...
I guess I'm not being clear. IT IS NOT ARBITRARY as you and other seem to think. No matter your R:R you can't just throw a trade at the wall and say "I won't get out unless I hit 3x my SL". I never said this nor implied such a simpleton approach.

I decided on 3:1 because a with a win rate of a mere 33% I can be profitable. However 3:1 must be applied to the market dynamics you are trading. I use market structure. If the market structure according to my analysis, doesn't seem to support a 3:1 trade then I don't take it. That's the difference.

Win rate should not be the first element one decides. It should be R:R because the fact is that win rate is very difficult to control. If you say I'm going to win 75% of my trades so I can have a low R:R then you are likely going to fail...and miserably so.

Most traders fail and it is precisely because they are clueless about R:R and think that win rate is the holy grail. Just look on this thread so far. How many value R:R. Few to none. How many traders on this thread are profitable. That's the question only each one can answer for themselves. If your not and your still ignoring or poo posing R:R then you know why.
Quoting Winston Reed
{quote} I guess I'm not being clear. IT IS NOT ARBITRARY as you and other seem to think. No matter your R:R you can't just throw a trade at the wall and say "I won't get out unless I hit 3x my SL". I never said this nor implied such a simpleton approach. I decided on 3:1 because a with a win rate of a mere 33% I can be profitable. However 3:1 must be applied to the market dynamics you are trading. I use market structure. If the market structure according to my analysis, doesn't seem to support a 3:1 trade then I don't take it. That's the difference....
Good morning, thank you for your response.

You state that you only take trades when the market structure supports a 3:1 trade, else you don't take it. Understood, but I don't see how that counters what I've said about win rate and R:R being connected. As you've stated, you're only profitable taking those trades as your win rate is 30%-50% in the context of your past performance, allowing you to be mathematically profitable.

I have no doubts about your trading and profitability, but my original point was, I've seen many people preach about 1:X Risk:Reward, and pretending a system is ultimately profitable just because the X is larger than 1, without first looking at the hit rate of wins vs losses the system produces over a statistically significant sample size.
Quoting Koop
{quote} Totally agree, do you adjust risk at anytime by moving stops to BE? I employ the same RM however, i move stops to break even once price crosses 1.5R as i personally can't stomach taking a loss on a trade which already offered some good profit. Only shortfall of SL to B.E is price would occasionally stop one out only to continue to target. The challenge is finding the sweet spot. On this subject, i think it all depends on your estimated win rate and trade frequency. Do you find signals often and do you win on those set ups 60-80% of the time?...
This is exactly what I was talking about hahaha. It seems the consensus in the trading community is you have to have a crazy high win rate for 1:1. If someone could hit 80% at 1:1 they'd be the greatest trader ever. I outlined in a previous post how hitting 55% at 1:1 with 20 trades a week would net a yearly gain of 100% (excluding commissions but assuming trading the ES futures contract commissions are very low).
This is one of the better debates I have read in some time.... that being said


You guys are focused on the wrong thing.


1:1 R on a 50% win rate = profitability, assuming your using something like the kelly formula to determine how much your wagering per bet

Unfortunately I cannot find the article that proves this, but to save you all some time....Kelly formula assumes each wager is 25% of your bankroll. (Optimal betting)

All of this however does not account for streaks (i.e think trends). This is why you can't just say Buy /Sell/Buy/Sell and assume your winning 50% of the time.
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