Risk/Reward Ratio

The risk/reward ratio has to be evaluated together with the probability of winning versus losing.

Would you take a bet where the payoff is 20 to 1 against you?

In other words, if you win, you win $1, but if you lose, you have to pay the other guy $20?

If you can win that bet 98% of the time, it's actually a pretty good play.

But if you only win 94% of the time, it's a loser.
 
BMK said:
The risk/reward ratio has to be evaluated together with the probability of winning versus losing.

Would you take a bet where the payoff is 20 to 1 against you?

In other words, if you win, you win $1, but if you lose, you have to pay the other guy $20?

If you can win that bet 98% of the time, it's actually a pretty good play.

But if you only win 94% of the time, it's a loser.
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Agreed. We have a scanner where you can rank the Reward:Risk and POP% together to find the top trades for this tradeoff:
d88ccd5967bec5a26529011682679acc.png

https://gyazo.com/d88ccd5967bec5a26529011682679acc
 
Goldlover said:
What part, in your opinion, does the risk/reward ratio play in your decision-making process, and how do you balance risk and potential financial gain?
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What a coincidence: in recent days I had planned to study a similar issue: high volatility vs low volatility and how it affects risk/reward and the result etc... (in my case primarily for options trading).
 
Meh,it's all the same to me. My risk per trade is dictated by my trading account size. I will say this though. If a slam dunk,5 star set-up falls in my lap I will put the pedal to the metal with a larger position size on that trade.
 
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there is no risk reward ratio in my book, only profit targets. let my account size to buffer the drawdown. any predefined ratio is just a gamble, not conviction.
 
mervyn said:
there is no risk reward ratio in my book, only profit targets. let my account size to buffer the drawdown. any predefined ratio is just a gamble, not conviction.
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Only Profit Targets ?
You forgot about the margin call o_O
Unless you have more than 220K for trading ES with 1 lot.
 
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Goldlover said:
What part, in your opinion, does the risk/reward ratio play in your decision-making process, and how do you balance risk and potential financial gain?
More...

Risk Reward plays an important role.
Because I want the tape to be biased in my favor.

If you toss an unfair coin with probability of head (80%) and tail (20%)
Then the probability of 5 consecutive heads is 33% and tails is 0.03%

In my opinion ... If I have a poor Reward to Risk (MFE/MAE) then I have zero edge.
Why ? Because the underlying instrument is simply into a random walk.

I don't want to take a random bet against a fair coin.

Reward to Risk is a consequence of an asymmetric probability distribution.
If the market has 60% chance to make an Uptick then ...
1. You'll more likely win than lose by buying (%)
2. You'll likely win more than lose ($)

"Don't fight the tape"
 
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Risk/reward ratio (which is really reward/risk) is meaningless to me. Market doesn't know or care, so why should I.

Put a trade on, stop in place and let price action do the rest. Where I will exit (with a profit or loss) price action will determine.

Not some silly R/R factor.

edit: just now see your post above mervyn which I agree completely with.
 
Sekiyo said:
Only Profit Targets ?
You forgot about the margin call o_O
Unless you have more than 220K for trading ES with 1 lot.
More...

never forget margin, default 4x by the broker, better use it by selling options.

don’t know where you get the es numbers. i just have a fixed dollar amount i want to get each day.
 
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