Does it ever make sense to have a risk-to-reward ratio of 2:1?

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nwoptions

I've been having great success buying minor dips in Investor's Business Daily's CANSLIM stocks for a 5% swing trade profit.

The problem: when I set my stop loss to be 5% below my purchase price (for a 1:1 risk reward ratio), I kept getting stopped out.

So I set my stop loss to 1 tick below the most recent swing low on the chart. This gives me more breathing room. Only 1 out of my last 10 trades didn't work out and my loss was 12%.

Is my risk of ruin too high because my stop loss is farther away? Am I setting myself up for failure by having a 12% stop loss?

Thanks
 
nwoptions said:
I've been having great success buying minor dips in Investor's Business Daily's CANSLIM stocks for a 5% swing trade profit.

The problem: when I set my stop loss to be 5% below my purchase price (for a 1:1 risk reward ratio), I kept getting stopped out.

So I set my stop loss to 1 tick below the most recent swing low on the chart. This gives me more breathing room. Only 1 out of my last 10 trades didn't work out and my loss was 12%.

Is my risk of ruin too high because my stop loss is farther away? Am I setting myself up for failure by having a 12% stop loss?

Thanks
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NO;
just aim @ better than 12%/long term average.1;1 is fine , just if you get on a lose streak= stop trading 'till you make a peaer profit again.
90%/9 is so far above average; 7 or 8 or 9out of 10 may work well................................................................................................:caution::caution::caution::caution::caution:,:caution::caution:BUT i may never trade again the ETF that i had a 12% loss on...................................................................................................
 
nwoptions said:
Is my risk of ruin too high because my stop loss is farther away? Am I setting myself up for failure by having a 12% stop loss?
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I will repeat this for the last time : ONLY a serious backtest can tell you where to put your stop for optimal profit and minimal risk, for your particular trading system.

Of course I am assuming the trading rules of your system are clearly defined.

Otherwise forget it, you are basically just gambling, not trading, and a 2 to 1 risk-reward ratio won't save you.

Playing a number at the roulette gives you a 35 to 1 risk/reward ratio, and yet your ruin is certain in the long run. The idea that a high risk/reward ratio will automatically give the trader an hedge is a total lie.
 
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A 2:1 or any inverse ratio is never viable for a retailer, because the win rate will fuck your ass when it drops, and it’s not a matter of if, but when. Even a 1:2 ratio won’t work in the long run. Any strategy that chokes off profit is destined to fail.

“The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”

—William Eckhardt
 
What is the volatility of the underlying for the time frame you trade? Find that out then put your stop 3x beyond that to keep your stop outside of the noise. Then make your 3x stop level less than 5% of your portfolio value. If you have a 12% stop and 5% profit, you would have to pick right ALOT to break even or the underlying is in a strong trend that never pulls back.
 
fractalize said:
A 2:1 or any inverse ratio is never viable for a retailer, because the win rate will fuck your ass when it drops, and it’s not a matter of if, but when. Even a 1:2 ratio won’t work in the long run. Any strategy that chokes off profit is destined to fail.

“The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”

—William Eckhardt
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Can you please recommend a good stop loss distance for my trades? I tried a 5% stop loss for my trades but got stopped out repeatedly by normal market fluctuations. Investor's Business Daily recommends even a 3% stop loss for swing trades. I don't think that would work with my trades though.

Thanks
 
nwoptions said:
I tried a 5% stop loss for my trades but got stopped out repeatedly by normal market fluctuations.
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If a 5% stop does not work then the entry (or even your entire system) is probably not good to begin with, simple as that.

Or your system needs a dynamic, volatility-based stop, like ATR (Average True Range).
 
  • I think you are mis-understanding a risk:reward ratio of 2:1.
  • As far as I know you can't get that R:R by trading stocks short term. (unless the stock is very volatile)
  • Options yes - stocks no.
 
OptionsOptionsOptions said:
I think you are mis-understanding a risk:reward ratio of 2:1
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??

Buy a $10 stock (before earnings announcement for instance), target is $11, stop is 50 cents.

2 to 1 risk/reward right there (you are risking 50 cents to earn $1 per share). Trade is also very short-term, as you can see.
 
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