Thoughts About Risk, Reward, and Trading

[tradingjournals]

Quote from djmartin:

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.

Last week Nasdaq 100 was doing an action similar to what you described, yet there were some posts hanging to the idea that they would continue to buy it as long as the support was not broken. So when the move happened it was so fast, I am positive people did not have time to realize the change, until it went down some 34 point.

So thanks again for your original thinking, and for sharing. If the market is smooth and moving in a direction, would it be correct to say that it would generally continue in that direction as long as it is smooth? What is the percentage of days in a year when the market moves smoothly? Would 44% percent be a good estimate?

If one were to measure/approximate/estimate the smoothness or lack of it, as you would feel it when you see the price, what would that measure/tool be? The idea is to try to have a tool to alert one if something like smoothness appears or disappears so that it is further investigated by the human.

 

[djmartin]

Quote from FXforex:

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.

The post went right over your head. I never gave you an amount you were up. I said if you were up in the position and a big buyer came in and the market never went bid(which means it never went up after his trade was executed), which should tell you that theres a seller holding the market, then a bigger seller steps in and the market moves 2-3 ticks down. That alone should tell you that the sellers are now in control. I said if the market moves 2-3 more ticks from what I just explained then that big buyer is going to feel more pain at that point he most likely will sell out of his huge position which will probably cause the market to sell off harder. So if your in a long position and you see this take place, why would you want to stick around, my point is some trader would stick around because there risk reward told them to instead of listening to the market. I never said being up 2-3 ticks mean your up 1:1risk reward at that point. I know my writing sucks but its clear enough to understand what i'm trying to say.

 

[djmartin]

Quote from tradingjournals:

Thanks again for your original thinking, and for sharing. If the market is smooth and moving in a direction, would it be correct to say that it would generally continue in that direction as long as it is smooth? What is the percentage of days in a year when the market moves smoothly? Would 44% percent be a good estimate?

It depends on the instrument your trading. I trade the ES which is not smooth at all, and it also depend on what time frame your trading. Take the ES, even on a trend day its not that smooth. The indices don't trend well at all, so why would you try to trend trade them? They run stop and reverse, run stop and reverse. So i counter trend trade them a lot which turns out to be the reversal point. Go look at a 1 minute chart of the ES, look at how many times it reverses. So for me I just expect the market to be choppy. Thats why i scale out of positions and have a runner just in case it runs and if it don't i locked in some profit. IMO theres only two ways to trade the ES intra day and thats one of the. Most traders don't really understand the instrument there trading.

 

[xelite777]

Quote from tradingjournals:

Most journals post trades. I thought why not start a thread in which thoughts about risk and reward, and other aspects of trading can be written down. All thoughtful comments/posts are welcome. If it is a thought you read somewhere and want to share it, write it and include the source.

Very good question TradingJournals.

Profitable trading is all about risk management and risk reward scenario.

The whole idea is to buy at support level IF (and only IF!) the distance between the entry point and the next resistance level is at least twice the size of your stop (2 to 1 risk reward scenario). And vice versa for short positions. Otherwise, just skip the trade and wait for a better trading opportunity.

If the trader can consistently do that he will make money in the long run, no doubt about that.

 

[NoDoji]

Quote from djmartin:

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.

Beautiful!

The difference between automated backtesting and the tedious manual backtesting I did is that I tracked what price did between the time it hit profit or stop loss. I learned what to expect after I put on the trade. I learned to remind myself that price only rarely goes in a straight line from entry to profit or entry to stop loss. What a difference this made!

 

[xelite777]

Quote from NoDoji:

Beautiful!

The difference between automated backtesting and the tedious manual backtesting I did is that I tracked what price did between the time it hit profit or stop loss. I learned what to expect after I put on the trade. I learned to remind myself that price only rarely goes in a straight line from entry to profit or entry to stop loss. What a difference this made!

An entire book has been written around that subject, it's called "Maximum Adverse Excursion: Analyzing Price Fluctuations for Trading Management" by John Sweeney.

A must-read in my opinion.

 

[djmartin]

Quote from xelite777:

An entire book has been written around that subject, it's called "Maximum Adverse Excursion: Analyzing Price Fluctuations for Trading Management" by John Sweeney.

A must-read in my opinion.

im going to have to read this book. Thanks.

 

[Huyang]

Quote from xelite777:

An entire book has been written around that subject, it's called "Maximum Adverse Excursion: Analyzing Price Fluctuations for Trading Management" by John Sweeney.

A must-read in my opinion.

xelite777:

thanks for the recommendation. May you elaborate more on how this book is a must read? Based on what i got from "searching inside in amazon", it has very good information.