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Risk reward question


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Risk reward question

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  #1 (permalink)
Lebanon, PA USA
 
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Hello,

I am new here and have a question i have been thinking about for weeks that is starting to drive me a little crazy. Ive been trading ES and MES for about a year. I am not consistently profitable. I am mainly trading off of discretion, some chart chart patterns, ta, and some levels and inventory patterns. I have tried everything from wide stops and wide targets, to tight stops and tight targets, to wide stops and small targets ( bad idea, i know) all in all out, all in and a runner etc. Mainly trading 2 lots in the MES untill i achieve some consistency. I know I should probably stick to 1 lots until i achieve consistency, but a runner is sometimes the difference for me. If I am spinning my wheels, I am curious if anyone has feedback on a good R:R to start. I am mainly targeting around 3-4 point moves. I have been doing a 8 tick stop with a 11 and 15 tick target. I only move my stop to BE if my first target is hit. Generally speaking I do not scratch trades or ever take profits early. I have been contemplating trying a 1:1 R for a while so I at least have a better idea if I am picking good spots and that seems like a good baseline. Any feedback on a good R and R to start for someone that lacks some consistency would be appreciated. Or any feedback from profitable traders on their R:R in general would be great.

Thanks

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  #2 (permalink)
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I'm also struggling with this. So far I've settled on removing the profit target, and instead taking profit using trailing stop loss. I'll activate the trail 1 tick below the previous bar once the price gets near a previous S/R.

It's not perfect, but it's the best I've come up with so far.
Fryer View Post
Hello,

I am new here and have a question i have been thinking about for weeks that is starting to drive me a little crazy. Ive been trading ES and MES for about a year. I am not consistently profitable. I am mainly trading off of discretion, some chart chart patterns, ta, and some levels and inventory patterns. I have tried everything from wide stops and wide targets, to tight stops and tight targets, to wide stops and small targets ( bad idea, i know) all in all out, all in and a runner etc. Mainly trading 2 lots in the MES untill i achieve some consistency. I know I should probably stick to 1 lots until i achieve consistency, but a runner is sometimes the difference for me. If I am spinning my wheels, I am curious if anyone has feedback on a good R:R to start. I am mainly targeting around 3-4 point moves. I have been doing a 8 tick stop with a 11 and 15 tick target. I only move my stop to BE if my first target is hit. Generally speaking I do not scratch trades or ever take profits early. I have been contemplating trying a 1:1 R for a while so I at least have a better idea if I am picking good spots and that seems like a good baseline. Any feedback on a good R and R to start for someone that lacks some consistency would be appreciated. Or any feedback from profitable traders on their R:R in general would be great.

Thanks

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  #3 (permalink)
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R:R is only half the equation - what's your winning percentage?

Go back and look at your trades. Figure out how many of them would have worked before getting stopped out for a similar loss, and HOW MUCH they went in your favor. Are you immediately wrong most of the time? Then you need to take better setups. Do most of your trades go a bit your way at first? If so you've got a chance.

Start fresh trading one lot only. Settle on the profit target you'll take EVERY TIME, and trade ONLY one lot until you're consistently profitable. Keep the R:R close, it's good for the P&L and your mental health (nobody likes one loser that wipes out 2-3 winners). Don't move your stop or target, even though you'll be tempted. This period is the hardest, going all-in all-out you'll NEVER catch the whole move. You WILL want to second-guess your exit on every trade. You need to become OK with this, just take the same profit automatically every time during this phase. You're building consistency, profit is (kinda) secondary. You'll also be figuring out which of your setups work better than others, so your winning percentage should be increasing. This is the point.

Once you prove you can do this consistently add another contract. You'll still take the same automatic profit on the first contract, but now you can try for runners on the second one. (Ideally IMO you want to be trading at least 3 contracts before adding runners - 2 first profit & 1 for a runner, but everyone's different.) Become consistent at taking quick profits AND managing the runners. Refine your setups even more. Add another contract.

Rinse, repeat.

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Fryer View Post
Hello,

I am new here and have a question i have been thinking about for weeks that is starting to drive me a little crazy. Ive been trading ES and MES for about a year. I am not consistently profitable. I am mainly trading off of discretion, some chart chart patterns, ta, and some levels and inventory patterns. I have tried everything from wide stops and wide targets, to tight stops and tight targets, to wide stops and small targets ( bad idea, i know) all in all out, all in and a runner etc. Mainly trading 2 lots in the MES untill i achieve some consistency. I know I should probably stick to 1 lots until i achieve consistency, but a runner is sometimes the difference for me. If I am spinning my wheels, I am curious if anyone has feedback on a good R:R to start. I am mainly targeting around 3-4 point moves. I have been doing a 8 tick stop with a 11 and 15 tick target. I only move my stop to BE if my first target is hit. Generally speaking I do not scratch trades or ever take profits early. I have been contemplating trying a 1:1 R for a while so I at least have a better idea if I am picking good spots and that seems like a good baseline. Any feedback on a good R and R to start for someone that lacks some consistency would be appreciated. Or any feedback from profitable traders on their R:R in general would be great.

Thanks

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The previous post had some sound advice .

I'll likely be going against "trading lore" here but the only thing I determine pre-entry is the risk. I do not know where I will exit. The exit is determined by the market action after entry which is out of my control & I exit when I see a "reason".That may come 1 tick or 2000 ticks after entry. The risk/reward is calculated on all completed trades & is simply a consistently evolving measure of the entry>exit efficiency of my method & my execution.

I am also an all in / all out trader. Leaving a runner does not make sense to me as if there's a reason to be out I should be out. I would hate to take full stop outs on all contracts & then not have all contracts make the full amount on the winning trades. Just my feelings.

I'd also suggest if you are using a fixed paramenter (target or stop) eg. 8/11 ticks you have a way of measuring "why" you chose to use those numbers now. eg % of x period ATR, daily volume, volatility etc. In which case if something changes in the market action you may need to widen/decrease your fixed trade parameters accordingly.

I need my method/execution to provide good enough metrics on 1 x contract in/out rather than relying on outliers, scaling , moving to breakeven etc so I suggest if using these things you always keep stats based back to 1 contract as if each contract is a stand alone method in its own right. ie. if using 3 contracts what are the metrics (win %, risk, reward, expectancy, drawdown, MFE/MAE, etc) for each of the contracts. This may help you see where things can be tweaked for better efficiency.

You'll often hear people say "you only need to be right say 30% with x reward etc" to be successful. Why 30%, why not 10% or 1% if the reward is big enough ! The problem is not to look back from an end point & see what would have worked. Its not the end point that matters, its how bumpy the road is to get there. Even with a higher win rate you'll get large strings of losers at some point. A lot of traders find it very hard to stick with a system & if a traders method is towards the lower end will bail out or choose to miss the inevitable big winner etc. However, there are obviously some successful traders who can do this so you need to find out what type of trader you are, how good are your entry/exit points etc in terms of what you'll be comfortable with to enable consistent execution.

Having said all the above, there is no absolute "best" way or "best" paramater for anything in trading & a lot is about what "works for you" which takes time & experience. If you keep trying, analysing, experimenting you may eventually find "your way" . The majority dont.

Good Luck

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  #5 (permalink)
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Etisan View Post
You'll often hear people say "you only need to be right say 30% with x reward etc" to be successful. Why 30%, why not 10% or 1% if the reward is big enough !


My own answer to this frequent question, and the reason why I wouldn't be comfortable with a win-rate below 30%, relates to the importance of avoiding bad losing runs.

I prefer a smoother equity curve, even if it's a slightly less profitable one in percentage terms, overall.

What I need to avoid, at all cost, is the situation of having a really long, bad patch and not knowing whether it's just one of the really long, bad patches you inevitably sometimes encounter with a win-rate below 30%, or whether what I'm doing has simply stopped working. I can't avoid to persist for ever while losing, to find out, so I must avoid that; having a win-rate over 30% (and preferably quite a bit over 30%) is the safe and practicable way to avoid that problem.

To take an admittedly extreme example, to illustrate my point: a 25% win-rate with an R:R of 1:5 makes twice as much profit, in the long run, as a 40% win-rate with an R:R of only 1:2, but I know which one I'd prefer.

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  #6 (permalink)
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Fryer View Post
I am curious if anyone has feedback on a good R:R to start. I am mainly targeting around 3-4 point moves. ... I have been contemplating trying a 1:1 R for a while so I at least have a better idea if I am picking good spots and that seems like a good baseline. Any feedback on a good R and R to start for someone that lacks some consistency would be appreciated. Or any feedback from profitable traders on their R:R in general would be great.

My first question back to you is, why do you use a fixed R:R at all? I'm not saying you shouldn't, but do you have a clear and convincing reason why you should? I think the responses you have gotten so far all can have value to you, and can help you with your question.

Why not do this (trail a stop and not have a target):

planetkill View Post
I'm also struggling with this. So far I've settled on removing the profit target, and instead taking profit using trailing stop loss. I'll activate the trail 1 tick below the previous bar once the price gets near a previous S/R.

Or, why not this (exit only when there is a reason to, without a fixed exit point):

Etisan View Post
I'll likely be going against "trading lore" here but the only thing I determine pre-entry is the risk. I do not know where I will exit. The exit is determined by the market action after entry which is out of my control & I exit when I see a "reason".That may come 1 tick or 2000 ticks after entry. The risk/reward is calculated on all completed trades & is simply a consistently evolving measure of the entry>exit efficiency of my method & my execution.

On the other hand, maybe a fixed R:R is in fact best for you, for you type of trading. If so, have you worked up the stats to show you that it is, and what it is? And under what conditions does your method work, anyway?:

mercrastius View Post
R:R is only half the equation - what's your winning percentage?

Go back and look at your trades. Figure out how many of them would have worked before getting stopped out for a similar loss, and HOW MUCH they went in your favor. Are you immediately wrong most of the time? Then you need to take better setups. Do most of your trades go a bit your way at first? If so you've got a chance.
...
Rinse, repeat.

I'm not advocating one way or another, deliberately, because you just talked about the R:R question, as if there were nothing else involved and that one number is the "best" for everyone. Your trading style probably should dictate what makes sense for you to use. Many traders set a definite target order based on R:R or some other method, and many want to let a trade run until something changes. Reading trade journals here on this forum shows that some traders can be profitable with one way, and others with the other, and for that matter there are other choices that traders make also. (Some other examples would be: set a target for support/resistance from a previous high/low or turn, or for some kind of projection, like a measured move, or at a pivot point, or VWAP, or a fib, or a moving average, or at any of these depending on what is happening, and on and on. Traders are ingenious.)

So, back to the question I originally asked, "Why do you want to use a fixed R:R at all?" Note that it may be exactly what you should be using, but can you say why, given your own trading style/method and what it works best with? And, assuming you should be using a fixed R:R, what is working for your trading?

Without the answer to those questions, I don't think that anyone can give you an answer to the question you asked. One size probably does not fit all.

By the way, this whole area is one of the major things that traders work on, fiddle with, experiment with, form opinions about, argue about and wonder about. So it's a good question, really. Now, what is it about the way you trade that lends itself to a fixed R:R, if in fact it does? If it does, you may be able to answer the question. If it doesn't, that will help too.

Bob.

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bobwest View Post

So, back to the question I originally asked, "Why do you want to use a fixed R:R at all?" Note that it may be exactly what you should be using, but can you say why, given your own trading style/method and what it works best with? And, assuming you should be using a fixed R:R, what is working for your trading?

Without the answer to those questions, I don't think that anyone can give you an answer to the question you asked. One size probably does not fit all.


Bob.


Thanks Bob, and everyone else for all of your reply's. I really appreciate you guys taking time to answer and give some feedback. The only reason I started using fixed targets, was to remove some risk after a reasonable goal, and when I start sliding targets I found myself sliding stops, and being a little too discretionary about everything. I figured I need some sort of solid rule based system, and some structure. I used to not use a fixed target for my runners, and I would get a little too comfortable letting them do their own thing, and not micro managing them. Then I found sometimes, If I was going for 5points on a runner based on discretion, I would get so fixed on that, I would wait and let it come back and stop me out at BE. This would lead to me doubling down, and revenge trading, and we all no how that goes. Thankfully I have fixed that problem, and doing fixed targets takes the emotions out for me. Kind of a set it and forget method if you will, and I can be at peace with the outcome regardless. I understand everyone is different in their approach, styles, method, and that is precisely why I wanted to get an idea of what other people are doing and what works for them. I am not convinced what I am doing is best, just kind of looking for some other opinions. I just found a rigid set of rules is best for me, otherwise I tend to get a little too discretionary about everything.

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Fryer View Post
I just found a rigid set of rules is best for me, otherwise I tend to get a little too discretionary about everything.

So do I.

Bob.

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  #9 (permalink)
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What made a big difference for me was getting my account past $200k. I felt like I had enough room to breathe when things didn't immediately go my way and also could bounce back if I took a decent loss. To get there, I had to take some wins that had set targets. That helped immensely as I was just spinning my wheels after about a month. If you can get your account large enough that you can afford to take on a larger stop loss, that would help out in getting stopped out early.

I'm still new so take it with a grain of salt, but I was able to do pretty well with taking a lot of small victories before feeling good enough to increase my position.

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