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Risk/Reward trading examples
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Risk/Reward trading examples

  #1 (permalink)
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Risk/Reward trading examples

Hi,
I want to start this following and advice that someone give me here. The objective is show risk/reward trades examples. Basically is show where you are, where you want to be, where you finally arrive and the risk in that way.
I will show ES and 6e examples. Keep trading simple is the best way to survive ( personal experience ), and the rules for the examples are very easy:
Trade validation R:R=1
Objectives minimum R:R> 1 but trying to locate objectives areas with R:R> 2 or major than that
Stop size: Es 6-4 tics/ 6e 6-8 tics
Type of trading: daytrading
Number of contracts traded: 3 can be incremented in size if i can reduce the maximum risk
I know that risk control is basic in trading and masterize that is an area where every trader need to work hard. Being realistic most of the time we take bad decisions and base your trading with a positive R:R ratio can give you and edge and can relax your trading decisions.


Last edited by ofatrader; December 14th, 2013 at 08:29 PM.
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  #3 (permalink)
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ofatrader View Post
Hi,
I want to start this following and advice that someone give me here. The objective is show risk/reward trades examples. Basically is show where you are, where you want to be, where you finally arrive and the risk in that way.
I will show ES and 6e examples. Keep trading simple is the best way to survive ( personal experience ), and the rules for the examples are very easy:
Trade validation R:R=1
Objectives minimum R:R> 1 but trying to locate objectives areas with R:R> 2 or major than that
Stop size: Es 6-4 tics/ 6e 6-8 tics
Type of trading: daytrading
Number of contracts traded: 3 can be incremented in size if i can reduce the maximum risk
I know that risk control is basic in trading and masterize that is an area where every trader need to work hard. Being realistic most of the time we take bad decisions and base your trading with a positive R:R ratio can give you and edge and can relax your trading decisions.

Discussing Reward:Risk without mentioning winning percentage is sort of pointless.

You can be successful with reward:risk of 10:1, 1:10 or 1:1. You can lose with them all, too. It all depends on the winning percentage associated with each.

There was an article in March 2013 Futures Magazine about this.

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positive ratio


kevinkdog View Post
Discussing Reward:Risk without mentioning winning percentage is sort of pointless.

You can be successful with reward:risk of 10:1, 1:10 or 1:1. You can lose with them all, too. It all depends on the winning percentage associated with each.

There was an article in March 2013 Futures Magazine about this.

Hi kevinkdog,
Thxs for your input. The intention of that is only find scenarios where the risk:reward ratio can be positive and show this examples. Using a negative ratio can be very hard and dificult trading because you need a high winning %. I'm not discussing any system, or trying to show it. Only is for ilustrate this concept:
R:R positive ratio
Thank's

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ofatrader View Post
Hi kevinkdog,
Thxs for your input. The intention of that is only find scenarios where the risk:reward ratio can be positive and show this examples. Using a negative ratio can be very hard and dificult trading because you need a high winning %. I'm not discussing any system, or trying to show it. Only is for ilustrate this concept:
R:R positive ratio
Thank's


I assume you mean "ratios greater than 1, or ratios less than one." Any negative ratio would mean a losing system, right?

In any event, I don't get what you are doing, so I'll just leave.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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All examples showed will be with a risk:reward ratio bigger than 1. I know that can sound strange but this thread was ceated for the suggestion of one member discussing that. Maybe can help him, maybe others. Who knows, but i want to start this trying to be helpful

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We can start trying to discuss this scenario

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First to take any entry we need to define the risk/reward scencario for evaluate the entry

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Now we know exactly the risk area, the entry area and the targets areas, and knowing that we can calcute the viability for the trade and manage the risk. Important how you manage the risk. We establish a maximum of 225 dollars risk and a maximum stop with 8 tics. The location for you stop need to be in the risk area (A), your entry point inside of the entry area (B) and your targets in the C,D,E areas

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Now the best important thing is Managing risk/reward/position sizing. Suposing that we take and entry long at 1.3720 and the potential reward initial at 1.3733 we can discuss 3 diferents situations totally real: 8tics stop/6tics stop/3tics stop

if we use a 8 tics stop: sizing 2 contracts. r:r initial 1.625
if we use a 6 tics stop: sizing 3 contracts. r:r initial 2.166
if we use a 3 tics stop: sizing 6 contracts. r:r initial 4.333

How you manage your risk, reward and position sizing in every trade can give a better advantatge in your trading.

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Another example on ES

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We can manage the same scenarios with the same risk per trade 225 dollars and suposing the entry at 1768 and the potential reward to the area C at 1770.50

8 tics stop
r:r initial 1.25 sizing 2 contracts

6 tics stop:
r:r initial 1.66 sizing 3 contracts

3 tics stop:
r:r initial 3.33 sizing 6 contracts

Another example about how well you can play with a r:r positive. Important to locate specific areas where entry and exit give you the edge to manage it in a positive scenario.
Wich is your edge in that?
Relaxed trading system and suposing that we will be more time wrong than wright, can give you the enough confidence for trade with a less % winning percentage.

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Risk Reward and Winnings and drawdowns

it all is a money management and risk one is willing to take on....or the question can be asked. Honey, when does risk and reward become gambling. Or how can one secure success by money management of stacking the odds in your favor. Banks use risk and reward to decide if they should even loan money to a business endeavor. Throw in experience (in trading it is paper trading) to determine if your gambling or have a viable business success they want on board with.

It is finding a balance to trade aggressively and yet conservative enough to take the draw downs in any system. Using 2% of ones account is conservative to allow a trader to endure draw downs in any system. Yet, does not allow for one to be more aggressive if they have a higher percentage of wins in their trading.


Look at this chart to get an idea of break even on R&R and winnings.

Risk Reward Break Even Win rate
50 1 98%
10 1 91%
5 1 83%
3 1 75%
2 1 67%
1 1 50%
1 2 33%
1 3 25%
1 5 17%
1 10 9%
1 50 2%

Gives one the idea of how higher rewards allows a trader to have lower percentage of wins and still be profitable, but does not take into account the draw down. In a risk of 1 and reward of fifty. The trader would have to have 50 trades to stay in the game. 2% would allow one to endure this draw down and put odds in your favor.....even in the worst scenario..

Not many traders emotionally could handle that many losses before a win without trashing their strategy approach or quitting. Even though a successful trader.

Starting out with an initial $6000 account would not allow it either in the emini of ES. It takes about 5 grand to just play and that only leaves one with about 8 trades unless they day trade. Draw down would eliminate a 1-50 R&R system without more capital to start with. So do not forget the amount of capital required to get in trade and draw down to endure the course to success.

Traders like to reward them selves for having higher percentage trades and here is my approach to that and yet be conservative in money management so I am not gambling. I personally agree and like the 2% rule.

If one has been keeping track of their RRW record they have numbers from experience(paper trading) to use when they start trading. And as those numbers change, adjust your trading investment risk on a regular basis. I do it every week as a day trader.

So if one has a $10,000 account and takes 2% for trading size. That would allow them $200 risk on a trade. If one has a winning record of 50%. Then I take the $200 times 1.5=$300. So $300 is what I can trade on the risk side.

If they have a winning record of 80%. Then 1.8 times the 2% of account size would give them $360 risk to trade.

So here is the calculations.

A $10,000 account times 2% gives one a risk to use of $200.

$10,000 x .02=$200

Winning ratio is 80% then put a one in front of it. Which is 1.8.

1.8 x $200= $360 to trade.

So if your risk on this trade is $150. $360 divided by $150= 2.4 contracts or two contracts can be used.
If the risk was $100. $360 divided by $100= 3.6 contracts or 3 contracts can be used.

This is how I handle risk-reward-win record.

Draw down is important in the money management scheme to succeed. And is done at the time of setting up the initial account only. After the initial account the risk-reward-wins will take care of draw downs. The minimum required would be Risk percentage times risk plus initial investment to get the amount of contracts one wants to trade to start with.

Calculate this way with a winning record of 33% and risk of $200 and initial investment in ES of $5060 (one contract).

33 x 200=6600 plus $5060 = $11660.

if one wants to trade a min. of two contracts the numbers would look like this.

33 x 400(risk times 2 contracts)=$13200 plus $10,120=$23320

Day trading would be no different accept that the going margin or initial investment is $400.

33 x 200=6600 plus $400 = $7000 initial account size.

That should keep one from having risk so high that they are gambling instead of managing their account in a risk to reward that will succeed.

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