Thoughts About Risk, Reward, and Trading

Quote from tradingjournals:

Good response! What would one say to those who might change their mind after the trade and do the opposite of what they planned: take a profit immediately if it is profitable, and hold on to the loser if it goes against them?
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One might say stop trading until you grow up.
 
Quote from tradingjournals:

I would say one should trade what fits one's psychology.
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And if one is trying to prove what a loser he is, then he definitely should trade without a thoroughly-tested, consistently-profitable trading plan. Or, if he has one, not follow it.
 
Quote from djmartin:
IMO risk reward is one of the most misunderstood aspects of trading. Of course we all want to risk 1 to make 2 or above but what if the market don't allow that to happen. Lets say you put on a long and your risk reward 1-3, markets starts to go in your direction, so far so good. All of a sudden your see a big buy come in and the market doesn't go bid, instead it pauses. Then a big seller steps in and the market jumps 2-3 ticks down. At this point in the trade your up say 1, what do you do, A) stay in the trade because your risk reward is 1-3, B) take your profit and let them battle it out, C) Do nothing and say to yourself I'll rather get stopped out then brake my trading rules, or D) take some off the table so the pressure is off then see what happens. My answer is D. The beauty is there's no right or wrong answer but the professional intra day traders i talk to don't pay a lot of attention to risk reward like you think they do. They take what the market gives them. In the above example if the market goes another 2-3 ticks against that bigger buyer he's going to probably cover which will lead to more downside action, why would you want to stick around because some trading book told you you much have a risk reward of 1-3. This is just my opinion. I know theres more than one way to trade.
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Quote from tradingjournals:
This is an excellent post! Thanks for posting.
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djmartin's post makes no sense, what sort of position has a risk/reward of 1/2 or 1/3 after only 2-3 ticks?
 
Quote from tradingjournals:

Could you share your source of data, and the tools in your test lab?

PS: Just that you know, I like your posts. (And I agree with you on the new highs, but for individual stocks which I think is what you were meaning).
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My source of data is a 5-min, and corresponding 1-min, bar chart or candlestick chart (doesn't matter to me). The source of the price patterns on those charts is from my broker's data feed.

I use a spreadsheet or a piece of paper and a pencil and make notes on the price action surrounding each appearance of the setup I'm testing.

:cool:
 
Risk and reward doesn't matter if you don't know what you are doing.. To be successful at trading you have to master multiple things and Risk and reward is just a small piece of the pie.. No one part of the pie is more important then the other pieces (even though some people don't believe this). Risk and reward can be done in so many ways like anything else.. What really counts is are you making money..
 
Quote from tradingjournals:
He explained why in a thoughtful way.
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But djmartin's post is missing a VERY important detail. What sort of position has a risk/reward of 1/2 or 1/3 after only 2-3 ticks?

Without that info the post is useless.
 
Quote from NoDoji:

My opinion is that R:R is not an isolated factor; rather it goes hand-in-hand with win rate.

Let's say I'm a day trader and I do an "eyeball" study of the 5-min price chart and a pattern stands out: I notice that when price stays above a rising 20-period EMA for more than 90 minutes without coming back to touch it and then finally pulls back to that 20EMA, far more often than not price rises at least N ticks before dropping N ticks below that EMA. I conduct a study of every appearance of this scenario over the past month and discover that 80% of the time price moves at least N ticks off the 20EMA without violating that EMA by N ticks more than 80% of the time. I believe I've found a setup with positive expectancy and decide to trade every appearance of this setup because in my limited study it had a win rate of 80% using a 1:1 R:R ratio.

Suppose during my study of this price action phenomenon, I further discover that 50% of the time price rises at least 2N ticks off the 20EMA before falling N ticks below it. It appears there is another positive expectancy method of trading this same setup using a 1:2 R:R. I decide to trade the same setup this way because I'll end up with less trades, therefore less commission cost.

If I ask you whether you prefer a risk:reward setup of 1:1 or 1:2, the logical answer to me is "not enough information".
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Your 100% right, Risk Reward and win percent go hand-in-hand. I just think traders put way to much effort in Risk Reward. What is the market doing right now. Another thing that don't get talked about a lot is, how did the market reach your target? Did it go there smoothly or did it chop back and forth. When traders backtest there method they don't take that into consideration, when they take there trade setup and the market start chopping back and forth they don't know what to do. Then after they get out of the trade it ends up hitting there target, in return the say to there self next time I'm staying in. On the next trade the market bias change but there to blind to see that so they stay in the trade and they end of getting stopped out, after all this there now confused we all know what happens when your confused and the cycle repeats it self. That use to be me. i'm was so worried about risk reward. One day I was trading and my mentor asked me what is the market doing right now. That one question I repeat to myself all day turned things around for me. I stop getting so caught up in risk reward, I just take what the market gives me.
 
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