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Hi, I've been day trading @ES for about 6 months now with varying results, about breakeven. Just to practice my entry really, I have been trading a set and forget 1:1 RR of 10 points each day I either win or lose, with no management post entry.
I realise this would mean I need to have a win rate of something like +65% to be profitable.
But my strategy does have an initial stop that can vary from a few points to up to 10 points max.
SO my question is, if I start trading with a stop that changes in size, how do I figure out what my RR needs to be? Just shoot for 1.5:1 or 2:1 or is there a better more mathematical approach?
Can you help answer these questions from other members on NexusFi?
You need to do it other way. This way you are trading RR, not a strategy itself.
Think this way, you have a signal to enter the trade, then you need to know where to place Stoploss, so they point you think "im wrong" and then and if you target is legit (1RR,2RR,3RR) you enter a trade.
Looking back most of my signals are reversal trades that can run anything from 8 points to +40 points but that is quite rare, if I trade 1:1.5 I feel I would have a higher win rate but lower P&L probably, its very hard to find a balance with so many variables!
You don't have that many variables. You have your system to point out entry point, you will place your stop, manage your trade according to your rules. Your risk vs. reward ratio is married to your win %. When your entry and stop are solid, if you try to get higher RvR, your win % will go down, if you reduce your RvR and take very fast targets, your win % will be very high. There is a sweetspot for every system which is optimal, that is your edge and you can calculate expectancy from those values to find it. Backtest or look your journal to see what is optimal combo for you.
I went around and around with this same issue when I started trading Price Action Trading Systems .Com (PATS).
That is also an entry system. But here is where it gets tricky. Classic, (as in his written manual) Mack is to trade a four contract unit. When you enter Ninja places a four unit stop (at 2 points)and three exits. First exit is at one point for two contracts. At 5 ticks the stop for the remaining two contracts is moved to break even. Second exit is at two points, and the third at 3 points. If the trade is going well you manually cancel the third exit and manage the "runner".
In his current live trading videos Mack enters with 20 contracts, then has 15 of them exit at one point leaving the other 5 as a runner with a break even stop.
This was driving me nuts trying to figure out the R's. Finally someone loaned me a copy of Van Tharp's definitive guide to risk and reward. It is around 100 pages and written for people who are managing money in multiple systems. Buried in there was a page for variable stop loss systems. Made me feel like I wasn't an idiot when he said you can't calculate it. You just use your actual experience with the system!
