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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?

  #51 (permalink)
 SpeculatorSeth   is a Vendor
 
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Madness View Post
My original post is meant to open minds into thinking outside of the box. If this approach works for me, it can work for others. But clearly, some people just don’t get it. They just regurgitated “standard” remarks, related to standard trading, found on the standard internet. God forbid you attempt to deviate from their flat earth thinking, they will beat you with a stick until you comply to their indoctrination. Stay open minded, and keep experimenting.

Ok so now we're getting the standard guru platitudes. People just don't understand and only the truly enlightened will join me! He's even making specific performance claims without posting broker statements. Not to mention suspicious accounts that have never posted before expressing interest. How long until he starts promoting his service and sending people PM's?

Don't let this smokescreen distract you from the fact that there are severe disadvantages to trading with a low reward factor. Such strategies tend to have hard drawdowns, and are not appropriate for most retail accounts. Despite all his talk about breaking from the standard, this is quite a common strategy that retail traders fall victim to.

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  #52 (permalink)
 
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 bobwest 
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TWDsje View Post
Ok so now we're getting the standard guru platitudes.

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  #53 (permalink)
 
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 Wikmar 
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Madness View Post
My original post is meant to open minds into thinking outside of the box. If this approach works for me, it can work for others. But clearly, some people just don’t get it. They just regurgitated “standard” remarks, related to standard trading, found on the standard internet. God forbid you attempt to deviate from their flat earth thinking, they will beat you with a stick until you comply to their indoctrination. Stay open minded, and keep experimenting.


Bad times are coming for you ............

Good luck, mate!

And thank you!. Good idea for a thread and thinking around Trading.

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  #54 (permalink)
outlawx
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Madness View Post
This is the first thread that I am starting here on Future.io so before I get into it, I wanted to say thanks to Big Mike and the whole Futures.io community. I have soaked in a lot information from this great forum and I am grateful for all of you whom have shared your experiences so that we can keep learning.

Also, please keep in mind that this is my unorthodox approach to this risk reward topic. Use at your own risk. I just wanted to share how I personally devise a risk reward strategy before going live. This method works very well for me but may not work for you or your style of trading. There are many creative ways to look at things when devising a risk reward strategy and this is just another one of those.

The same question pops all the time: What is the best Risk Reward Ratio? But is that the right question?

At one time or another most traders will ask themselves that very same question. And honestly, it’s a tough one to answer considering all the different variables involved with trading. But there is (at least I feel) a way to answer this question, but from a different perspective. One that does not directly focus on the risk part at all, at first.

I trade the NQ and I do not use stop losses. However, I do have a 50-pt catastrophic stop loss, but I do not include it when building and back testing a strategy. More on that later.

One of my strategies is where I shoot for a 10-pt profit target. Back in the day, I also tried the 1:1, but it wasn't until I completely removed the common “risk reward" stop loss that I went to an 85%+ win rate on the strategy alone. I also managed to pick up another ±10% of profitability bumping it up to a ± 95% win rate, which I’ll also explain later.

So why no stop loss is better? For two reasons. Your trade needs breathing room, and you have to account for running of stops.

Let's hypothetically say that you have insider information telling you that the price is headed to an important price level. Well, even though you now know where it's going, I’m sure you can agree that it will not get there in a in a straight line. Instead, there will be many peaks and valleys along the way. Those peaks and valleys are designed to take your money while in transit to that important price level.

The key for me is having a fully back tested strategy that is proven successful during normal market conditions but without having any stop loss. That’s right, no conventional stop loss. With that said, a stop loss does needs to be part of your strategy, but it should not get in the way of making profit. Instead, it should help you when you truly need it.

Try this. Back test your strategy with no stop loss at all, and see if your trade would actually reach your profit target. Don't pay attention to the actual loss amount for now. If your trade wins vs losses percentage is bad, then your strategy was bad from the start and needs to be either optimized or scrapped all together. For me personally, if a new strategy that I created cannot get good back testing results without a stop loss, then I didn’t work hard enough on that strategy.

In trading, talk is cheap, so I wanted to share the 60-day back testing results on a strategy I created using 3 NQ contracts.



Strategy Performance report #1 shows my strategy results without any stop losses used. The Strategy Performance report #2 of the same strategy are the results of a 1:1 risk reward ratio. I know what you’re thinking; what about using a 1:2, or 1:3 ratio, or, 2:2, or 3:3 ratio? Been there done tested that, none of them work. At least not for this specific strategy.

Two points I want to cover from earlier. One is that 50-pt stop loss. When testing a strategy, I do not include it into the strategy building because it’s just like the 1:1, or 1:2, it doesn’t work and it would falsely skew my results into negative territory where I would believe that my strategy either sucks or just flat out doesn’t work. This is clearly demonstrated with Strategy Performance report #2 when using 1:1. The 50-pt stop is only there for catastrophic reasons during live trading.

Secondly, how do I squeeze another ±10% of profit and avoid those drawdowns? Looking at Strategy Performance report #1 (without stop loss), you will see the number of wins and losses. Well, there are only 30 losses. I don’t know about you, but that’s very few, and they are typically similar in nature. At least that’s my experience. So, all I needed to do now is to identify the reasons why those trades went wrong, then I know what to look for on the chart to prevent the bad trade from even being taken in the first place.

As opposed to Strategy Performance report #2, and trying to figure out the whopping 209 bad trades with a 1:1 ratio. But worst yet, think that my strategy sucks and dumping it.

In closing. I think the question is not, “What is the best Risk Reward Ratio?” The question is, “How good is my strategy, without a stop loss?”

Thoughts? Questions?

Happy Trading!

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.

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  #55 (permalink)
 
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outlawx View Post
Sorry don't have enough messages to quote your 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 couldn't agree more. It took me years to accept that hard stops are necessary. Most of the time you can get away without stops, the problem is that one unlucky situation might blow up your account.

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  #56 (permalink)
outlawx
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SBtrader82 View Post
I couldn't agree more. It took me years to accept that hard stops are necessary. Most of the time you can get away without stops, the problem is that one unlucky situation might blow up your account.

You can get away with it for so long before it catches up to you. This strategy imo would work better in the equities market with a ton of research and back testing. But I also do not know how he trades and how his trading style is to assume anything more.

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  #57 (permalink)
 
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 Sandpaddict 
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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.

OK. If at this point anyone that doesn't understands what TWDsje is saying isnt going to get it.

That is such a beautiful quote!!!

And I just love this.... "Optimize the volume of this cube."

Lol. Thank you TWDsje

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  #58 (permalink)
 
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shokunin View Post
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.

This took me SOOO long to realize and was the reason its taken me so long to get profitable. (Not consistent yet) but better results than ever before.

Another detriment was trading micros. I was taking WAY TOO MUCH RISK because of the small size. If I leveraged those strategies into the minis I'd be utterly destroyed.

Now Im trying to keep losses small by playing defense but even more so taking small profits along the way. Its extremely hard and I still can't believe it's working because it doesn't make intuitive sense but it works.

And in fact its basically opposite of what Ive done for the last 6 years. Ive ALWAYS tried to go for a 2/1 plus ratio. Hasn't ever worked long term. I always end up with small winners and more AND larger losers. Not a great strategy. Whatever.

And it suits me as I %100 believe entries aren't really that important as you never really know where the markets going (plus it depends on stop loss/target/volatility/emotions/goals ect) taking small profits and painfully cutting those losses has worked AS a strategy.

Its hard to believe you can profit by taking so many losses but maybe thats why it works. (My initial stop is 2.5 times my target. BUT now I NEVER let that get hit.) Again opposite of what I was doing.

Wow don't know where all that came from. Cheers

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  #59 (permalink)
 
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 WoodyFox 
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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.
Sandpaddict View Post
OK. If at this point anyone that doesn't understands what TWDsje is saying isnt going to get it.

That is such a beautiful quote!!!

And I just love this.... "Optimize the volume of this cube."

Lol. Thank you TWDsje

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  #60 (permalink)
 
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wldman View Post
@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



I have not finished reading all posts here but this stopped me in my tracks as you said a few things that resonated very strongly with me.

"Greed -> take position. Stop loss -> fear" WOW! So true!

I have said many times and repeat in different ways in almost every post. Entries are the least important part of a system (whatever the system).

The risk management part of the system is where the money is made. As you said a random entry system with GREAT management can be profitable in the long run. Try reversing that. Try to take great entries (whatever that means. An entry only makes sense in relation to the exit.) And throw risk out the window. We all know how that ends.

These are only my beliefs but I really would like your opinion as it is also what I believe.

I am no expert. I am not trading real money again till Im consistently profitable but my focus is %95 on the management AFTER entry! Not before.

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