Why favorable R:R?

[riskfreetrading]

Quote from rolextrader:

It's bizarre how many traders know this fact and yet they still can't contol themselves.

.

I do not think they know it. They have heard it, but knowing is a different thing. They have to be given a proof (not a statistical trade history proof). The proof comes from experience/losses, but there is a mathematical proof for that fact.

I have invited many people to know that proof, and I received only 2 requests out of thousands who heard it. Majority of people either know (which I doubt) or are oblivious to the dangers.

A child learns to avoid fire after multiple burns, but a mature individual if given something similar to fire that he can recognize, he will never touch it or use precautions. Hidden pitfalls in trading are dangers like fire, but the adult does not recognize them as fire, so he keeps being burned without even realized what burned him. He needs to be shown the evidence that he touching fire.

 

[timbo]

Quote from riskfreetrading:

... A child learns to avoid fire after multiple burns, but a mature individual if given something similar to fire that he can recognize ...

Building towards your idiotic 10K post? Why the dribble and thread starting? I'm serious! Entertainment in your lonely world?

 

[clooch]

Just what works for me. My entries are predetermined, my stops are predetermined, My risk:reward changes as the market gets nearer my target. I do not use it to determine my target but only use it when managing a trade to help lock in profits.

It is easier understood as a trailing stop that fluctuates based upon the proper risk:reward determined by my target exit

 

[dima777]

RE:RI and accuracy combine to form mathematical expectation. you can read more on it here:
http://www.forexhit.com/learn-forex/money-management-system.html

you can simulate different trading outcomes through this simulator:
http://www.forexhit.com/calculators/fts/forex-trading-simulator.htm

Cheers
Dima

 

[cunparis]

I wanted to share my experience relating to the OP's original post.

I have developed a few trading systems for futures. In each case I optimize on the total net profits. In other words, while developing the strategy I do not care about the % win or R:R ratio, just the total profits.

Every positive system I've developed has a win rate of 70-80% and a Reward/Risk ratio of 0.80-1.60 (the 1.60 trades so infrequently that it's not useful so really the range is 0.80 - 1.0).

I've tried to get a better R/R ratio, I'd like to have 2:1. But I can't figure out a way to do it. And I'm convinced that it doesn't matter. Having the highest net profit is more important than the ratios. And a smooth equity curve is icing on the cake.

Here is a great site that will draw equity curves based on win rate and R/R. I use it a lot while testing to see what the equity curve might do (put 10 or 100 in the Lines box):

http://www.hquotes.com/tradehard/simulator.html

 

[nexttothemoon]

Some very good links in this thread showing the value of trading small % risk amounts (1-2% maximum) AND equally importantly of having a positive mathematical expectation.

 

[Mr J]

If you practice sensbile capital management, the risk to reward is irrelevent. All that matters is that the trade is +ev and appropriately sized.

 

[jimbojim]

Quote from Mr J:

If you practice sensbile capital management, the risk to reward is irrelevent. All that matters is that the trade is +ev and appropriately sized.

You can make money this way but you must trade very frequently and this exposes you other risks, like systemic and unsystemic risks.

Unsystemic risk can be diversified and in this case you limit your returns

Systemic risk is nondiversifiable.

If the risk to reward ratio is irrelevant as you claim, it may be difficult to achive returns above the market. You are better of putting your money in a cd.

 

[Mr J]

Quote from jimbojim:

If the risk to reward ratio is irrelevant as you claim, it may be difficult to achive returns above the market. You are better of putting your money in a cd.

This statement makes no sense to me. If a return is restricted, it's by poor trading, not the risk to reward. Good returns can be achieved at all sorts of ratios, it comes down to the trader.

 

[MitchoMacca]

Quote from Mr J:

This statement makes no sense to me. If a return is restricted, it's by poor trading, not the risk to reward. Good returns can be achieved at all sorts of ratios, it comes down to the trader.

Agreed.