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real world stops and risk reward ratio.

  #21 (permalink)

St. Louis
Trading Experience: Beginner
Platform: thinkorswim, NT8
Favorite Futures: equity and fx futures and options
Leon of Pizza's Avatar
Posts: 133 since Sep 2013
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mcteague View Post
...the chart said that was where risk should be...

Stop location should be derived from the chart, usually ignoring the last swing H/L. Also, prospective support/resistance is an area and 1t beyond its extreme is inside that area, so no place for a stop.

And stop location can be found from your experience logs. For any particular pattern or quantitative setup, what are the results for the last 50 times that you saw it set up? What is the W/L ratio? What is the min, max, avg MAE/MFE of the winners? What was the context when the outliers occurred?

Also, I got the impression that you think a risk/reward ratio alone determines the expectancy, or maybe conflated expectancy with probability of a win. My apologies if I misunderstood it. Expectancy is a value for a group of trades and it uses both the P/L and W/L. There are successful traders who take more losses than winners and they're good earners because they plan for appropriately higher risk/reward ratios. I'm not one because I can't take the psychological heat, but they exist. I'm lazy too, so I fell into a method that doesn't require me to work out expectancy in the planning stage. I monitor it in the result instead.

I use risk minimums for each product I trade and a minimum 1:1 risk/reward. For the Russell, I use 20t min, so if something on the chart tells me I can't get 20t or better, I don't take the trade and therefore avoid that level of noise. If I see from my experience logs that a particular pattern is producing a lot of winners with 25t MAE / 40t MFE, I'll adjust my plan to take 30t of risk for a 35t target. These values expand and contract, but they're always derived from observation and record keeping and the ratio always has to support a min 50% win rate.

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