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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?

  #61 (permalink)
 
Sandpaddict's Avatar
 Sandpaddict 
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datahogg View Post
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.

AKA... the longer you trade the larger the chance you'll see a larger drawdown then ever before. (Think LTCM) I think they STILL claim it couldn't happen in many many lifetimes)

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  #62 (permalink)
 
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 Sandpaddict 
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WoodyFox View Post
Good points, but I'm not sure anybody is suggesting only no stop strats to find a best Risk Reward ratio. Just whether a best ratio exists?

Umm. I'm not sure about that. The original poster claims he uses ATR profit targets within volatility and 50 point stops.

It broke off into a discussion about a universally good R/R.

My beliefs about that are just like TWDsje said earlier. Sure there is but WHAT ARE THE CONSTRAINTS? Type your parameters into your backtesting engine and it'll spit it out. Then do it over many many. Like probably thousands of iterations of those parameters and average over all of them. Again its just a number. An average.

What does that mean. Nothing other than thats what happend in the past.

Just my 2 cents.

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  #63 (permalink)
 
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 Sandpaddict 
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Madness View Post
The standard estimation for how long it takes a business to be profitable is about two to three years.

A 15%-20% profit margin for a business is considered good.

In trading, the baseline is 3.5-4:1. What were the parameters that concluded that? Was it any of our chart setups or our in and out signals? No, it’s not.

All three of these “standards” above are no different than the standard 2 ply toilet paper. There has to be a standard. We need a baseline to measure perfomance.

Whether it is doing business or trading, if you use a standard approach, you'll get standard results. I on the other hand, like to wipe my ass with 5 ply toilet paper.

Lol. I just had to jump in here. You really left yourself open here. In trading terms. You must have big poops (drawdowns) to need 5 ply. Also 5 ply must be expensive for a business (commissions?) or (big stop losses).

I mean no disrespect. Just being funny. I 100% get your point about testing with and without a stoploss. I believe I understand why as well. Correct me if I'm wrong.

You have to test without a stop loss as if your strategy gets an 44 percent win rate WITHOUT the stoploss how do you expect it to work with one.

On the other hand if you get a 80% winrate without a stoploss then you obviously have a profitable system. Then you add a catastrophic stop loss for emergencies.

I agree with you up to and until it goes passed testing. I think its a good exercise like examining your MFE/MAE.

But on the other hand if it works for you thats ALL THAT MATTERS!

Cheers

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  #64 (permalink)
 
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 Wikmar 
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A thought:

The longer term the trades have, the higher the benefit / risk ratio should be, and vice versa.

There will be a trade length where the ratio will be 1/1, but this may be less.

For example; scalping, it seems logical to accept ratios less than one, as long as the reliability is high enough.

Another different thing is whether that relationship should be an operational objective or a measure of whether our operation is valid, whether it is worth it.

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  #65 (permalink)
 
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outlawx View Post
From what I seen from your post, I'll give you some of my insight. Starting from the beginning to the end. Trading futures especially NQ/RTY/ES/CL etc. Stop losses are strictly needed. A mental stop doesn't cut it, and especially since you have not tested this system on a LIVE account just a demo, they are two different ball games. Trading NQ without a stop loss especially with how volatile the markets are on a live account without much experience (sorry not trying to be mean just reality) is very dangerous. Now, we as retailers/majority of firms still cannot move Index prices in major ways. Looking at your 60-day backtest results, I would pick the stop loss one in a heart beat. Your Avg winning trade is $597 w/o Stop Loss, while your Avg losing trade is $2200 w/o Stop Loss. Your largest winning trade was $600 w/o Stop Loss and your largest losing trade was $6600 w/o Stop Loss. These are just some but very important red flags I noticed. Even tho you have more trades using a stop loss which makes it harder to compare to using no stop loss. Your avg winning trade was $595 with a stop loss. Your avg was $597 losing trade with a stop loss. Largest winning trade was $600 with a stop loss. Largest losing trade was $600 with a stop loss. Any average person looking at these two and comparing them can tell you trading with a stop loss is better. Using a stop loss gives you a base to your system, and then you work based around your stop loss. When I look at a trade placing my stop loss is the first thing I want to see, knowing where to place it defines the rest of the R/R makes me think is it worth it to take the trade or not. It will save you a TON of stress in the future to use stop losses. But if you can handle mental stops all the power to you.

I like your observation Outlawx. Looks like it would be the good start of a system starting with the latter, with stops, option.

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  #66 (permalink)
 
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 Sandpaddict 
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WoodyFox View Post
With all do respect....

"I didn't say that an optimal ratio doesn't exist. I'm saying the question doesn't make any mathematical sense"

So he agrees it could exist, but does not understand it mathematically...isn't that the point of the exercise?


On a side note.
There is 2 things going on in the thread. Some best market RR ratio and the ideal of trading without a stop to get a best RR ratio.

I agree on the no stop and having dangerous MAE.

But a good mean reversion strategy that is found with out stops can be made more desirable with lower risk of high MAEs Especially when dealing in a market with higher IV. There are ways to do this. Not full fixes, but certainly tradeable fixes.

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"But a good mean reversion strategy that is found with out stops can be made more desirable with lower risk of high MAEs Especially when dealing in a market with higher IV. There are ways to do this. Not full fixes, but certainly tradeable fixes."

...ABSOLUTELY AGREE. This is the exception as it makes sense... in a mean reverting market.

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  #67 (permalink)
 
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 SMCJB 
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Big Mike View Post
@Madness, just wanted to say I like your avatar

Agree. I was (am) going to say the same.


Madness View Post
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.

If you subscribe to the market makers trigger stops school of thought, that's easy to avoid. Don't use conventional stop AMOUNTS. I'm sure there are a lot of stops 5 ticks, and/or $1000 and $2000 above and below the daily opening price. Nobody is looking for a stop $789 below the open!


Madness View Post
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.

Reduce a 'few minutes' to 'seconds' or even 'micro-seconds' and you are High Frequency Trader. I gather that's a decent business to be in.


WoodyFox View Post
But a good mean reversion strategy that is found with out stops can be made more desirable with lower risk of high MAEs Especially when dealing in a market with higher IV. There are ways to do this. Not full fixes, but certainly tradeable fixes.

+1. Definitely holds true for me.


Sandpaddict View Post
AKA... the longer you trade the larger the chance you'll see a larger drawdown then ever before. (Think LTCM) I think they STILL claim it couldn't happen in many many lifetimes)

While I do agree with your point I think LTCM is a bad example. Firstly a large chunk of their losses were due to 'strategy creep' but their complete collapse was a result of Wall Street feeding upon one of their own.

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  #68 (permalink)
 
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SMCJB View Post
While I do agree with your point I think LTCM is a bad example. Firstly a large chunk of their losses were due to 'strategy creep' but their complete collapse was a result of Wall Street feeding upon one of their own.

Agreed. That was a stretch. I think was trying to make a point but the point is ONLY that... the longer you trade the more likely you'll see a black swan event. And/or your largest drawdown.

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  #69 (permalink)
 
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Hey @Sandpaddict

Yeah I can attest to the random entry theory. I used to do that to applicants that wanted to work on the trading desk.

You need both, entries and exits, to be really good over the long run. Maybe it could be said that the two items that are in your control are when you enter a trade and how much you will lose?
I say it often that risk is the number one consideration, meaning "first" thought and most vital.

Over your chosen time frame everything has a range to put in. What do I expect from this? Is it against trend or a reversal...then I'm out immediately if I'm wrong. Once I've achieved a reasonable piece of the anticipated range, do I want to press this trade and look one time frame up?

The fear/greed thing is something that most people get wrong, imo.

Let me know if you want more color.

-Dan

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  #70 (permalink)
 
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wldman View Post
Hey @Sandpaddict

Yeah I can attest to the random entry theory. I used to do that to applicants that wanted to work on the trading desk.

You need both, entries and exits, to be really good over the long run. Maybe it could be said that the two items that are in your control are when you enter a trade and how much you will lose?
I say it often that risk is the number one consideration, meaning "first" thought and most vital.

Over your chosen time frame everything has a range to put in. What do I expect from this? Is it against trend or a reversal...then I'm out immediately if I'm wrong. Once I've achieved a reasonable piece of the anticipated range, do I want to press this trade and look one time frame up?

The fear/greed thing is something that most people get wrong, imo.

Let me know if you want more color.

-Dan

@wldman

We could always use more color please!

BTW- Hope you start posting in your journal again. Invaluable information!

Robert

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You make your own opportunities in life.
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