The 2/1 risk/reward MYTH... - Page 2
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Thread: The 2/1 risk/reward MYTH...

  1. #11
    Quote Originally Posted by ;
    The point is this: do NOT trade simply because you prefer the Risk/Reward ratio, the risk/ratio alone is completely meaningless, trade as your entry/exit points give you a mathematical advantage.

    Of course this mathematical advantage itself can only be discovered during testing, but that's another story.
    And if your mathmatical border expects that you've got a better than 1:1 risk to benefit? Then what?

    What about a 30% advantage? Like trend following systems. Can we just throw these out the window despite their own profitability as you believe that risk to benefit is unimportant?

  2. #12
    Quote Originally Posted by ;
    And if your mathmatical border expects that you have a better than 1:1 risk to benefit? Then what?
    Then take the trade my friend, where's the problem??

    Quote Originally Posted by ;
    What about a 30% edge? Like trend following systems. Do we throw these out the window regardless of their profitability because you feel risk to benefit is unimportant?
    Can I say that? Where ?

    This is another idea to meditate on:
    Take a specific hour of the day, let's say 9AM EST.. Flip a coin and if it comes Tail bet up the GBP/USD will proceed up 60 pips from the end of the day unless you're stopped by a 20 pip loss. Do the reverse (market ) if it's Head.

    So we've got a 3/1 risk/reward scenario here, are you with me so far?

    Ok, do this a a million times (days) and you will notice that you're consistently losing money (due to the spread), though the risk/reward ratio is good.

    Get it now, fellow Currency Market trader?

  3. #13
    Quote Originally Posted by ;
    Then spend the commerce my friend, where is the problem??



    Can I say that? Where ?

    Here is another thought to meditate :
    Take a particular hour of the day, let us say 9AM EST.. Then flip a coin and if it comes up bet that the GBP/USD will proceed up 60 pips from the end of the day unless you're halted by a 20 pip loss. Do the reverse (market ) if it is Head.

    So we have a 3/1 risk/reward situation here, are you with me so far?

    Okay, do this a a million times (times ) and you will notice that you're constantly losing money (because of the spread), though the risk/reward ratio is still great.

    Get it now, fellow forex trader?
    Can you show me in which it's been composed to base a trade solely on risk/reward? I think your misinterpretation of the material you're studying has direct you to this moot conclusion.

  4. #14
    Quote Originally Posted by ;
    Could you show me in which it has ever been composed to base a transaction solely on risk/reward? I believe your misinterpretation of the material you read has lead you .
    Not at all, I started this thread since too many traders (newbies or amateurs) with this forex forum and other forums globally assume that if they lose less on a transaction (in comparison to what they could make) they are trading the right way.

    Here's a typical dialogue between those traders through a chat session:

    Hello, what exactly are you currently trading now?

    I simply shorted the Yen, I have a hunch (??) , my risk is only 15 pips along with my take profit is set at 60 pips

    Oh, fine, then even in the event that you lose that is not a huge deal, you only have to win once to recoup all your losses

    Well that is NOT Okay and it's a big deal, trading only since the Risk/Reward ratio is still great (and only because of this ) is never a good thing to do.

    That is the message I had been attempting to deliver now.

    Having said that to the FX Trading Station, I have to shut a (profitable) euro place.

  5. #15
    FXT,

    I see exactly what you're saying. . .but I think others may not know.

    Basically, people, what he's saying that having a Risk Entry is pointless unless you have a system that gives you a proper winning percent.

    What FXT is saying IS right, there's a myth that having a Risk/Reward ratio of 2/1 is necessary.

    What FXT isn't explaining correctly (in my opinion, no crime, FXT) is that more important that RR is the expectancy (win ratio). You must use your win ratio to figure your RR. . .which is absolutely the case.

    Having a 2/1 RR is just some random number that a lot of traders stick by for whatever reason.

    The issue I have with the illustrations is they don't properly describe how to calculate your true RR according to your expactancy.

    From the example of the heads or tails reverse with a 60 to 20 gain on the GBPUSD, what is suggested is that there is a 50% likelihood of calling long or short, but this is not the expactancy of this system. . .the expectancy of this system is dependent on a trade strikes 20 pips before it strikes the TP. At a vacuum (random chance), you would expect that chance of the price going up versus going down in a point will be 50 percent. . .however, that is not what we're calculating. . .we're calculating the opportunity of avoiding a 20 pip SL versus a 60 pip TP. . .those chances cannot be quantified (because if they could, you would be wealthy ).

    Let's put it another way...

    Why is it the case that if we're completely sure you'd lose money with a 3/1 RR and horrible expectancy you could not simply invert the path of the trade and win?

    Think about it. . .if we sure that when we were to flip a coin and then bet in the direction of this flip that we'd lose money. . .why would not you wager with a 60 SL along with a 20 TP in the opposite direction of this flip?

    In the other side is a collapse then the inverse has to be authentic, right?

    Well the reason that neither system works is because the expectancy of this very first system cannot be quantified properly. Hence neither system's expectancy could be quantified...

    That is why TP and SL aren't your authentic dimension of Risk Reward.


    Quote Originally Posted by ;
    Then spend the trade my friend, where's your problem??



    Did I say that? Where ?

    Here is another idea to meditate on:
    Take a specific hour of the day, let's say 9AM EST.. Flip a coin and if it comes wager up the GBP/USD will proceed up 60 pips by the end of the day unless you're halted by a 20 pip loss. Do the reverse (sell) if it is Head.

    So we have a 3/1 risk/reward situation , are you with me so far?

    Okay, do this a a million times (times ) and you'll observe that you're constantly losing money (because of the spread), though the risk/reward ratio is still good.

    Get it now, fellow forex trader?

  6. #16
    I love your post. Halfway through I was going to point out, in a roulette it is still random, versus here you can have a lot of reason to believe something will happen the way you believe.
    And after that you mention statistics.

    I've lost a trade because of disperse after. Played with an AUD/USD news release. Was right from the direction. I sit out a lot of scalps and such because I am afraid I will not cover the spread.
    In stocks should you want to have more money with less movement and not worry about commissions, you wager more. In FX that spread is always fixed. Wonder if it restricts retail volume.

    Quote Originally Posted by ;
    Due to this I feel that trades that simply uses benefit to risk of less than two, could potentialy cause you to destroy or breakeven in the long term. You've got to have a system that is winning percentage to take advantae of 1 risk to reward ratio. And by what I read in Van Tharp and other publications, most successful traders make money from less than half of the trades (lt;50%).
    Which goes to my preferred, or perhaps only trading slogan I go by. Larger gains are lost by smaller.

  7. #17
    risk reward ?????
    Yes it's important but the headake is constantly stops, therefore how I exchange today is pure risk based on daily shut so that the risk is just 1 thing I cannot calculate but I exchange with cash management on the winning trades and add to them as well.when I add to my transactions I add smaller compared to the first and so on this way I remain in concentrate on the transactions in profit 1 of my favorites is buy take profit on half let additional run and then add a pause at breakeven. But no matter what it is very important to find that method that operates for 1 and then keep going in this way. Many might think im nuts trading with no stops probably yes but it works for me and I have taken any big losses)

  8. #18
    A very simple formula for your expected payoff:

    Payoff = Sum(Probability(Id ) * Payoff(I)) where I is a specified outcome.

    Example:

    RR is 2/1
    Win% is 60% = 0.6

    Lets decompose the RR so that a win is equivalent to a payoff of 2, loss is payoff of -1.

    Payoff = WinAmount*Win% LossAmount*(1-Winpercent )
    Payoff = 2*0.6 (-1)*(1-0.6)
    Payoff = 1.2 (-0.4)
    Payoff = 0.8

    As you repeat this over and over again your payoff will probably strategy 0.8 because of The Law of Big Numbers

    which should be pretty self-explanatory.


    Added helpful stuff:

    Chance of having x losses in a row is (1-Winpercent )^x.
    Ex: 4 losses in a row using these numbers.
    (1-0.6)^4 = 0.4^4 = .0256 = 2.56percent

    If you want to find out the number of losses in a row it's possible to maintain with y dollars and possibility it will occur. Losses equal floor(y/LossAmount). Since you can't have half a loss for this exercise, the integer is just meant by floor below the decimal. Then do the losses in a row measure.
    Ex: y = 1000, Loss Amount = 110, Winpercent = 0.6
    flooring (1000/1.1) = floor(9.0909) = 9
    (1-0.6)^9 = 0.4^9 = 0.000262 = 0.0262percent of $1000 gone

  9. #19
    Quote Originally Posted by ;
    Chance of having x reduction in a row is (1-Winpercent )^x.
    Ex: 4 losses in a row using these amounts.
    (1-0.6)^4 = 0.4^4 = .0256 = 2.56percent
    This is true ONLY in the event that you assume that the results of each trade is random and not related in any way to the results (win/loss) of the preceding trade.

    I strongly feel that any system using a positive mathematical expectancy (a backtested and profitable FX strategy in our case) does NOT generate trades with random results.

    In other words, as you lose while trading, chances of winning the next trade increase!

    Yes I understand, a lot of mathematicians in this forum are going to jump into the ceiling and shout:'' What the hell is he referring to!!!!!!

  10. #20
    Quote Originally Posted by ;
    In my view when you trade, you do not trade agains your broker(like at a casino),the broker is an intermediator, along with the spread is theyr winning(profit you can state ).
    At a Walt Disney movie perhaps, but in real life some (repeat SOME) forex brokers won't hesitate to wager against youpersonally, taking not only the spread but your position as well.

    Don't forget that your friendly FX broker has ever an (almost unfair) advantage: he can see the fair price of a currency pair instantly and adjust his position accordingly, you cannot.

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