Risk management is a dictator. A lot of people here are operating in a dilemma and not knowing it.
They may be able to otherwise make a lot of money but they simply close that opportunity to themselves immediately.
Risk management in today's market
- Thread starter granville x
- Start date
Risk management is a dictator. A lot of people here are operating in a dilemma and not knowing it.
They may be able to otherwise make a lot of money but they simply close that opportunity to themselves immediately.
I think most people who say they don't use stops (and are successful) actually do stop themselves out of the market or even stop and reverse, but they just don't set hard stops...more of a mental stop or even a gut stop. If not, then they lose and they lose hard. I know a swing trader who recenly took a 50% drawdown in account equity in one month because he refused to stop himself out of a couple of losing trades. I personally never trade without a hard stop.
The original question deals with how often you expect to hit your target. If you are a good scalper and you have a 70-80% accuracy rate, then you can use an even money 1:1 ratio and still make good money. In your case that might mean using a stop of $0.08 when going for a target of $0.10 after accounting for your fees. In the current market conditions, I think this is more doable than going for 30 cents while only risking less than a dime, or going for 15 cents and risking a couple of pennies.
PEG LEG JOE
The original question deals with how often you expect to hit your target. If you are a good scalper and you have a 70-80% accuracy rate, then you can use an even money 1:1 ratio and still make good money. In your case that might mean using a stop of $0.08 when going for a target of $0.10 after accounting for your fees. In the current market conditions, I think this is more doable than going for 30 cents while only risking less than a dime, or going for 15 cents and risking a couple of pennies.
PEG LEG JOE
Talking only about reward to risk ratio, as was already mentioned, has no sense because there are other connected parameters that define together the features of a trading system. Trading with reward to risk equal to 0.5 and high percentage of winning can be very profitable and can have very smooth equity curve. The challenge in this case is to find a strategy to protect against rare big loosing trades.
As this thread continues it becomes clear that we are dealing with some basic truths about the market. These truths become very pronounced when trying to optimize one's system/model of trading.
However in an effort to keep things as simplistic as possible, I will maybe restate what others have said for the benefit of those who are not yet in a comfort zone with their trading system/model.
THROW OUT THE IDEA OF AN EFFECTIVE 3 TO 1 REWARD/ RISK RATIO!!!!!
I do think these situations exist, but very infrequently. I could be wrong.
Like Tiger Woods said about his monster driving ability " It's a work in progress" - the same goes for my system/model. And I don't profess to have reached "trading utopia" as some others have proclaimed on ET. But what I have seen frequently, like Peg Leg Joe, is setups with 1 to 1 ratios that can be lessened over time (trailing stops).
Some major reasons for 1 to 1 ratios (initially) are statistical repetitiveness (timeframe) in conjunction with overall profitability.
Optimize risk/reward, timeframe and profitability and you'll be far ahead of the game. But don't forget, there are many other chapters.
Much Success to All,
I gotta disagree with ya, Brother Elliot...
For example, I have one low intensity system which does an average reward to risk of 2.9:1 over a long period of time that I have been trading it i.e. on this system, my average gain is nearly 3 times my average loss... of course the % win is what suffers, which is only 37%...
I tell ya, there are loads of traders out there getting an average R:R of 3:1... but anyone claiming to get a 70% strike rate on it is either a liar or a billionaire... even Linda Raschke (New Market Wizards p305: read it and do the R:R math) claims to only get an average R:R of 2.25:1 with 70% (I use the word "only" in a relative sense... such a performance by Linda is remarkable)... my scalping systems get around 65%-70% on 1:1... I really gotta find out what Linda is doin that I ain't
Quote from candletrader:
For example, I have one low intensity system which does an average reward to risk of 2.9:1 over a long period of time that I have been trading it i.e. on this system, my average gain is nearly 3 times my average loss... of course the % win is what suffers, which is only 37%...
I tell ya, there are loads of traders out there getting an average R:R of 3:1... but anyone claiming to get a 70% strike rate on it is either a liar or a billionaire... even Linda Raschke (New Market Wizards p305: read it and do the R:R math) claims to only get an average R:R of 2.25:1 with 70% (I use the word "only" in a relative sense... such a performance by Linda is remarkable)... my scalping systems get around 65%-70% on 1:1... I really gotta find out what Linda is doin that I ain't
We might be trying to say the same thing with different words.
By confining to a 3 to 1 ratio are you not jeopardizing the win/loss ratio? This in turn reduces overall profitablity. So, in effect less risk per trade setup but more risk on overall performance. It is all risk. Maybe Linda does have the answer(s).
Thanks for the reference. I'll check it out.
Much Success to All,
3:1 is simply the average outcome... many trades will be worse and some will be better... the win % rate is the other factor which you must pay equal attention to, and is not the % of trades with 3:1, but the % of winning trades of total trades, the average of the winning subset being 3:1...
One thing we can all agree on is overall (average) outcome (performance).
The originator of this thread had questions on risk/reward relative to individual trade setup stops and profit targets. And the original question is "How do you manage your risk?". Now we are discussing overall (average) risk.
Sometimes you can't see the forest for the trees.
This, I agree, is the way to examine and manage risk - by overall average outcome. Again, IMO, looking at a 3:1 initial trade setup risk/reward can be fatal. Hey, if you can get it, GO FOR IT!
Much Success to All,
harry your comments seem muddled and ultimately unhelpful. this post is about risk management. what is your definition of risk management?
comments like:
"If you want tight stop you must use better knowledge to chose better your entry point for example which can only present itself on some occasions." - this is crap. you are talking in riddles. i don't think you have a basic grasp of simple statistics.
obviously tighter stops will degrade your w/l ratio, BUT the tradeoff is smaller (but more frequent) losses.
there is no free lunch only tradeoffs.
placing stops is like pricing an option. what is the key to pricing an option? - VOLATILITY. you can think about a stop as the equivalent of paying an option premium (price of insurance if you like), to cut off the left tail of your probability distribution. the tighter the stop (smaller the option premium) the less chance of exercising (where entry = strike price) for any given volatility.
my advice on stops is to place them as a function of volatility (price them like an option if you will). from there you can back out your position size (some call it money management), which is the key to risk management.
He's French... what d'ya expect?
