dropping a bomb

[whitster]

he's right, and people should study more game theory and psychology.

i suspect there are a lot of losing retail traders here. they love to talk about risk/reward when they really don't understand the concept

the point is this.

i can enter a trade at any time with a stop of 5 pts and a target of 15 pts.

that has a favorable "risk/reward" but it is clearly not a positive expectancy trade.

you can have a trade setup that has a stop of 20 pts and a target of 10 (a so called poor "risk/reward") BUT if GIVEN those parameters, it results in target being met before stop 92% of the time, that's a GREAT trade, has high positive expectancy, etc.

managing risk is exceptionally important. most traders can't even DEFINE their edge, but they think they understand "risk/reward" so it's all ok.

 

[sporky]

ok, I can't call myself a poker/craps player but it sounds like y'all are saying it's a matter of probabilities. yes?

 

[EMRGLOBAL]

True, most of the ETers do not trade, if they do, the try and swing trade from the 401k account. But hey, at least the buy buy buy.

But if you really do have to ask such a question, it is pathatic. Now, if you were to ask one to evaluate an new "Risk/Reward? model, tracking numbers and %, then I would take the trader serious.

"Parents basements" lol

ET is like CNBC.....a joke but fun to watch.

E

 

[WAEL012000]

Quote from sporky:

in retrospect I thought this is the best forum for this thread...

let me go ahead and put it out there, risk/reward ratios are a fallacy. yes? no?

since i'm new around here I probably should say I've been trading futures over a period of almost 20 years. i've made and lost my fair share. so I am not a newbie.

many say don't take a trade with less than 3:1 and certainly not less than 2:1. whatever...pick your own numbers.

now, a basic tenet for any trader should be "anything can happen" (and it usually does, lol). if that's the case how can one realistically measure risk/reward?

as a day trader, the way i've been doing it is with support/resistance and fib levels. but again, anything can happen and usually does. so, I often think i'm kidding myself when measuring risk/reward.

in other words, we can know what we are willing to risk, but there is no way to really know what the potential reward is since ANYTHING CAN HAPPEN.

what say u?

The objective of the risk/ reward ratio is to make you mechanical in your trading. It also helps you in becoming more picky in choosing your trades. If I am giving the market an X amount of my money for outsmarting me, I will be damned if I am going to let them get away with anything less than double the amount of money that I am willing to lose if I am right!!!!!

There for, I will only enter trades that I feel confident that will achieve such goal for me. I am in control of my decision, not the market.

 

[BJL]

Quote from sporky:


it's just that people talk about risk/reward as if it really is quantifiable. risk is, but not reward cuz we don't know the future.

nor is risk quantifiable.

 

[maxpi]

If you know exactly where you are going to take profit and where you are going to stop out you can know the risk/reward ahead of time. If you use TA to enter, take profits, and exit, like I do, you can only know the average win to average loss ratio from history.

 

[dandxg]

I have been thinking about positive expectancy and game theory a lot lately. Let's say one has a method that has a 2-1 reward to risk with a 65% win ratio, obviously a positive expectancy. You have your stats and they are accurate, you have collected atleast 200 samples, your max consecutive numbers of losses is 4. The problem is at 4 consecutive losses you hit your max stop loss for the day. Should you ignore and hit the next trade because according to game theory your chance of getting the next winner is high or quit according to plan? Maybe a trader should change their plan and up their max draw down for the day? I believe I know the answer, but at 2 years under my belt, I am looking for more experienced feedback.

 

[simki]

Quote from BJL:

nor is risk quantifiable.

yeah, i agree to this too....

Unless you are doing something like long options..... very often risk is not quantifiable too....

 

[sporky]

ok, granted, markets can go through your stops.

but, one can still quantify a point beyond which one wants out. Let's not split hairs.

 

[blackchip]

I WISH I was posting from my parents basement.

Quote from selecto:

sporky, don't let it get to you. Many of the posters on this board do so from their parents' basements.