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What is the best Risk Reward Ratio? But is that the right question?


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What is the best Risk Reward Ratio? But is that the right question?

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  #31 (permalink)
 TWDsje   is a Vendor
 
 
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WoodyFox View Post
I'm sorry, have you read the whole thread. Did I or did I not start in on the conversation by quoting one of SBtrader85 studies?

So then just admit you're talking about total net profit? Why is that so hard? Or is it because you know that it just leads us down the same path?

For instance, what if I decided to make my reward factor infinity? That means I'll buy it and hold it forever. Or maybe slightly less ridiculous I'll buy at the start of the decade and hold it for 10 years. That should probably give me a pretty high reward factor.

At which point you might say that those examples are silly, and don't help to answer the purpose of the experiment. Which means that you have to put limitations on it. Like the strategy needs to take a certain number of trades over the sample period. And those limitations are why you get the answers that you do.

It's not because the market lends itself towards one ratio or the other. There is an infinite number of profitable strategies, and any single strategy could have whatever reward factor you want. So why do you get the reward factors you do when you optimize your backtests? It all just depends on where you were looking in the first place.

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  #32 (permalink)
 WoodyFox 
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TWDsje View Post
So then just admit you're talking about total net profit? Why is that so hard? Or is it because you know that it just leads us down the same path?

For instance, what if I decided to make my reward factor infinity? That means I'll buy it and hold it forever. Or maybe slightly less ridiculous I'll buy at the start of the decade and hold it for 10 years. That should probably give me a pretty high reward factor.

At which point you might say that those examples are silly, and don't help to answer the purpose of the experiment. Which means that you have to put limitations on it. Like the strategy needs to take a certain number of trades over the sample period. And those limitations are why you get the answers that you do.

It's not because the market lends itself towards one ratio or the other. There is an infinite number of profitable strategies, and any single strategy could have whatever reward factor you want. So why do you get the reward factors you do when you optimize your backtests? It all just depends on where you were looking in the first place.

Listen, I'm tired of explaining the same thing over and over. We are not looking for a pretty high reward factor. And no the examples are not silly . If you would read the posts in there entirety, you would notice post 22 and I quote

"Also knowing how to calculate standard deviation under different time frames, you will start to see this 3.5/1 keeps working at higher a lower time frames. That of course is limited as you near the extremities. There are additional factors that must be considered both ways."

I repeat for the nth time... No one is saying there aren't a gazillion things that can change a risk reward ratio. We are simply entertaining a fun experiment to delve into the conception of some optimal risk reward ratio that is best fitting to a market in most conditions. Whether this exist is just an experiment. You my friend, with emotion, are clearly against the ideal of this. I share some of your doubts. But I must confess, you wear me out and have made it no longer a fun experiment. LOL.

Don't take this personal, I think you just didn't understand the thread as the way I do.

Stay well my friend... we will cross in another thread and then we will see I to I.

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WoodyFox View Post
I repeat for the nth time... No one is saying there aren't a gazillion things that can change a risk reward ratio. We are simply entertaining a fun experiment to delve into the conception of some optimal risk reward ratio that is best fitting to a market in most conditions. Whether this exist is just an experiment. You my friend, with emotion, are clearly against the ideal of this. I share some of your doubts. But I must confess, you wear me out and have made it no longer a fun experiment. LOL.

Don't take this personal, I think you just didn't understand the thread as the way I do.

I don't think you understand what I'm saying at all. I didn't say that an optimal ratio doesn't exist. I'm saying the question doesn't make any mathematical sense. It's like saying optimize the volume of this cube. Ok I'll make the cube have a length of infinity. Optimization only makes sense if there are additional constraints.

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  #34 (permalink)
 WoodyFox 
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TWDsje View Post
I don't think you understand what I'm saying at all. I didn't say that an optimal ratio doesn't exist. I'm saying the question doesn't make any mathematical sense. It's like saying optimize the volume of this cube. Ok I'll make the cube have a length of infinity. Optimization only makes sense if there are additional constraints.


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 Grantx 
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Start date = 20 July 2020
Number of trades = 532
Timeframe = 60min
Symbol = ES
Size = 1 contract
slip = 2 ticks
commission = 2 ticks
Direction = long only
Stop = 13 points
Target = 25 points

Only 1 trade in the market at a time. Trade opens only when prior one has hit target or stopped out.


To test the 1:2 risk reward ratio.

1hr

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  #36 (permalink)
SunTrader
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I, like OPoster, have been trading since prior to the DotBomb 2000 collapse and don't use Reward/Risk as a trading metric. Price does what it does, not what some formula says it should. But what I do use is PriceAction (what some call structure) to place and adjust stops and targets - as well as have a backup catastrophic stop in the event wild things develop rapidly.

My only 2 cents for this topic ... I think.

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  #37 (permalink)
 shokunin 
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One issue I can see with this method is that it would be very difficult to trade with large leverage. My personal goal in trading is to increase leverage and run strategies that allow trading massive size. In order to do this, my objective is to continuously reduce my stop distance while simultaneously increasing win rate.

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  #38 (permalink)
 WoodyFox 
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SunTrader View Post
I, like OPoster, have been trading since prior to the DotBomb 2000 collapse and don't use Reward/Risk as a trading metric. Price does what it does, not what some formula says it should. But what I do use is PriceAction (what some call structure) to place and adjust stops and targets - as well as have a backup catastrophic stop in the event wild things develop rapidly.

My only 2 cents for this topic ... I think.

No formulas. Market structure is involved in most of my edges.
Any strategy that has stood the test of time, has been ones that have a basis for structure that stay consistent. They are walked forward using market volatility. I have used different ways to approach this but they are just different ways of finding the same thing. What if they perform best (through out time) at a 3.5 ratio regardless of when the standard deviation expands and contracts (shifting stops and targets), or when moving the strategy to smaller and higher time frames.

So as you trade, and your ratio's change when SR changes...do you ever feel that if you would have only picked trades with same ratio, at the end of the year you would be at the same place? I do not discretionary trade and I'm curious of a discretionary traders confidence (in a way jealous of this confidence). Obviously you do well and I do understand a lot of traders have a knake for trading this way.

I also am not admitting there is some best ratio. I will not rule it out though.

But...
The more 6/1 trades you take their probability starts falling and as you work your way to the 1/1 ratio you start loosing sight of your edge.

What if the market has a consistent median in there somewhere? I think its a good question.

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  #39 (permalink)
 wldman 
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@Madness

The initial post here is interesting and should be source for meaningful discussion. I really appreciate that @Big Mike has found a way to hit my inbox with interesting threads as I would not see this unless I'm tagged.

I have very limited time today and will be out tomorrow so I'm going to delay a detailed response until I can read the entire thread.

You are on to some interesting questions that I certainly have an opinion on. Two primary trading emotions are "greed" represented by taking a position, and "fear" represented often by a resting stop loss. It has been demonstrated that random entries combined with brilliant and disciplined risk management can make money over time. I've commented here before that a system is spurious and that it is the risk detail that is producing "alpha". IMO approach to risk is maybe the most debased topic in all of retail trading.

If anyone cares to entertain that discussion tag me in this thread and I will be able to engage early next week.

Everyone, trade well and be well.

-Dan

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 datahogg 
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Notice the attached Monte Carlo analysis. Trade long enough and you are guaranteed at least 5 losses in a row.
With a black swan event of 20+ losses in a row.

Attached Files
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