yes sure!! First let me say that I think that there is no right or wrong in trading, so there is probably not an absolute optimal RR from a math standpoint. However if you do not scalp and you try to take some "reasonable" chunk out of the market, I think that most of the times anything in the range 3.5:1 to 4.5:1 risk reward is the best way to go.
I came to this conclusion first from a practical experience and second by build a very simple simulator.
You can see a thorough description of my experiment here:
As I mentioned in previous posts I don't believe market is "random", so I do not believe in the existence of noise. However many traders believe that there is at least some level of noise and …
In the experiment I was assuming that prices are "normally distributed" with variance equals 1. In this scenario the optimal value of RR depends on the stop that you use relative to the variance.
In practical terms you can think that the variance is the ATR of the day and you must assume that the stop cannot be too small compared to ATR. Thinking that your stop can be 0.05 when the variance is 1 would be unrealistic because it would mean that you can be extremely precise in your entry. Also your stop must be "reasonably big" compared to commissions. If you combine the theoretical results of the experiments with some practical experience you will probably arrive at the same conclusion.
Consider that in real life: you don't know what the daily range will be, you don't know the exact probability distribution of the market etc...
In the same thread I show a picture of the optimal RR for different values of the stop loss, see the results here:
I think the results are very consistent with the ones that I obtained from my simulator. Let me make some observations:
the main difference between my simulator and your is that, if a trade does not reach neither the stop loss nor the target I generate …
Please don't misunderstand my experiment because it's not a "mathematical theory of everything", it's just a practical experiment that was meant to give me some hindsight. Also when I say a "optimal value" of RR, I mean something that can be right to use 85% of the days. Of course market is always changing and there are days in which you can ask the market a 10 times your risk, because there is a big trend.
The following 3 users say Thank You to SBtrader82 for this post:
Hello Adilius, Sorry for the really late response.
So, before you can understand my stop loss you have to understand the meaning of my thread. The whole point to my thread is to be able to test a strategy without being unskewed by stop-losses that are usually triggered by market makers running stops.
There are 4 requirements I need to classify a strategy successful. These requirements are:
1) Your strategy has to give you a 90% or higher win rate. Meaning it reaches the price target.
2) Your trade only lasts at most a few minutes. (1 sec to 20 min)
3) It has to give you consistent backtesting results under normal market conditions for 60 days.
With that said, instructions on how to use the ATR to adjust to the current market conditions are explained in my post.
Now, once you’ve established that your strategy meets the 3 requirements above, there is requirement number 4. And that is to “trust your strategy". And while some may not like my trading style, “trust your strategy” is a quote that all traders use no matter their trading style.
If you run your strategy without a stop loss through a simulator, and it doesn’t reach your price target, then that strategy does not work. Even less with a stop loss.
As far as my stop loss, yes, it is there at every trade I place. BUT ONLY THERE for a sudden unforeseen movement in the market that could be due an important news flash, glitch, flash crash, whatever that takes the market out of normal conditions.
And as far as a trade that goes against me, that 10%. I have written instruction in my post about that that 1 trade out of 10 that needs to be identified and eliminated before incurring a loss.
Lastly, as matthew28 says, never average down, especially with futures. I also never hold for a day or days. In and out the same day, and start fresh the next.
The following user says Thank You to Madness for this post:
I absolutely agree with you here. The strategy I use in my post cannot use a 4.5:1 or 3:1 ratio. The results of the signal I use for the strategy in my post, is a maximum of 12-15 handles that it will quickly pop up or down. So using 10 handles as my price target is optimal, and the best I can get for that particular signal.
There is no one almighty R:R, only what our minds would like us to get as a reward or the standard R:R we read about online. But R:Rs have to be tailored not to what we would like to get, or whatever the “standard” is, but to what we can get.
