The 2/1 risk/reward MYTH... - Page 3
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Thread: The 2/1 risk/reward MYTH...

  1. #21
    It is already shown that the only'advantage' necessary to beat this game is money-management - a random entry will probably work:

    Tom Basso made a simple, random-entry trading system #8230; We determined the volatility of the market with a 10-day exponential moving average of the average true range. Our stop was three times that volatility reading. The same stop was trailed in the close, once entry happened by a coin flip. On the other hand, the stop could just proceed in our favor. The stop moved when the markets moved in our favor or whenever volatility shrank. We also utilized a 1 percent risk model for our position-sizing system. #8230;
    We ran it on 10 markets. Plus it was in every market, either short or long determined by a coin flip. #8230; It made money 100 percent of the time when a risk money management system was inserted. #8230; The system had a (trade achievement ) reliability of 38%, and that's about average for a trend-following system.

    From'Trade Your Way to Financial Freedom', Van K. Tharp

    This is only one example.

  2. #22
    Quote Originally Posted by ;
    It has already been demonstrated that the only'advantage' required to conquer this game is money-management - a random entry will work
    Tom Basso made a simple, random-entry trading platform #8230; We decided the volatility of this market by a 10-day exponential moving average of the average true range. Our stop was three times that volatility studying.
    Stop right there and re-read the previous sentence Daemien: Our first stop was three times that volatility studying...

    I'm sorry but that is NOT (NOT!!) A stage, because you're investing in sync with the market. You observe the market and you fix your stop/trailing stop so this isn't a random trade , far from it. It is similar to counting the cards in a Blackjack table (such as in the Tom Cruise film Rain Man) and betting accordingly, your stakes aren't random anymore.

    A strictly arbitrary entry/exit system will go into a transaction randomly and depart the transaction following a PRE-determined halt or limit target has been reached. You can't alter your stop/trailing cease as you trade and call that a random entry method.

    Actually this so-called arbitrary system you're describing is simply a trend following system in disguise, even though you're using a coin to enter the transactions because, once again, your departure point isn't arbitrary. Keep in mind that exit points AND the entry have to be arbitrary.

    Please tell that to Tom Basso and Van K. Tharp

  3. #23
    The point was about the entrance, not about trade-management once a position has been taken. And in this situation, seeing as how the stop was a monitoring one, it would have been as arbitrary (or not) as the markets motion. And of course it is a trend following system - they cite that in one of the last sentences.



    D.

    Quote Originally Posted by ;
    Stop right there and re-read the previous paragraph: Our first stop was three times that volatility reading...

    I'm sorry but that is NOT (NOT!!) A random-entry stage, since you are investing in sync with the market. You see the market and you fix your stop/trailing stop so again this isn't a trade that is random anymore, far from it. It is similar to counting the cards in a Blackjack table (such as from the Tom Cruise film Rain Man) and gambling accordingly, your bets aren't random anymore.

    A strictly arbitrary entry/exit system will go into a trade randomly and exit the trade following a PRE-determined stop or limit goal has been reached. Your stop/trailing stop can not be modified by you as you trade and call a random entry system.

    In fact this so-called arbitrary system you are describing is merely a trend following system in disguise, despite the fact that you are using a coin to enter the transactions because, once again, your exit point isn't arbitrary. Remember that both exit points AND your entry must be arbitrary.

    Please tell that to Tom Basso and Van K. Tharp

  4. #24
    Quote Originally Posted by ;
    The purpose was about the entrance, not about trade-management once a place has been taken.
    The purpose was about pure arbitrary entry/exit points, please visit my prior posts. Your entrance is arbitrary but your exit is not, so your case is not a valid one, from that point of view. The idea of making money in the forex just by flipping a coin would be a childish utopia.

    Like I stated before, simply flip a coin, Head buy (or Tail sell) the euro each day with a profit goal of 60 pips and a stoploss put a 20 pips and see if you're able to make ANY money with that truly random forex system, after 1000 trades!


    Quote Originally Posted by ;
    And in this situation, seeing how the halt was a monitoring one, it would have been as arbitrary (or not) since the markets movement.
    You forget that the market itself is not arbitrary, otherwise we would not be able to make one red cent from it, no matter what system you are using!!

  5. #25
    Quote Originally Posted by ;
    dismissing the 1/2 risk reward ratio is undoubtedly a flawed argument. Trading in FX is very different than playing roulette or playing lotto. The odds of winning is very modest with betting.

    But from the financial markets, even though nobody can forecast the market, you have sufficient edge from fundamental and technical analysis to get you on the winning side given that you follow a certain method using consistency. And also the fact that every transaction is a uniqe chance, you make sure you will be statistically ahead by getting the most rewards with your risk on every trade.

    Due to this I feel that transactions that simply uses benefit to risk of over 2, could potentialy cause you to destroy or breakeven in the long term. You've got to have a system that is always 60-70% winning percentage to take advantae of 1 risk to reward ratio. And by what I read in Van Tharp and other publications, most prosperous traders earn money from less than half of their transactions (lt;50 percent ).
    I could not said it better. Here is the Probability Ruin Matrix. It reveals the odds of destroy your account according to your gain to loss ratio and R/R. The matrix says it all, see it on your own:

  6. #26
    Quote Originally Posted by ;
    I couldn't said it better. Here's the Probability Ruin Matrix. It reveals the chances of destroy your account based on R/R along with your win to loss ratio. The matrix says it all, see it for yourself:
    Yes thank you, we are all (I hope) well conscious of the relation between RR, winning percent and probability of ruin. This is probability mathematics stuff.

    However, I shall go even further: REGARDLESS of your RR ratio and winning percentage, you can never eliminate the potential for ruining your Currency Market account span. The risk zero simply doesn't exist.

  7. #27
    I'm with FXTerminator. I am hoping that I don't misunderstand his points.

    I'm not so familiar with this matrices. But this is precisely what I know about winning the market.

    We have to make over we shed ( how obvious). Reduce 100 pips, Win 900 pips. Internet gain 800 pips.

    It doesn't matter how we do so.
    Either Method
    A - Reduce 100 pips after being wrong 50 occasions, but be right 5 times and win 900.
    B - Reduce 100 pips after being wrong 5 times, but be right 50 occasions and win 900.
    (These instance looks funny but you get the idea)

    To me personally, R/R calculation is too blunt. Can anyone estimates Rewards? It is possible to set the risk with Stop loss, but rewards? No matter how great the math is, even if we use numbers from source that is dubious, the calculation will be useless.

    There is a remedy to our inability to calculate rewards. The so-called
    -reduce your losses short (reasonable prevent loss, proceed SL to break-even when profiting, try to reduce Risk)
    -ride in your winners as long as possible. (you try to increase Rewards as much as possible)

    R/R thought operates intuitively, not quantitatively since there's no fantastic amount to define Rewards.

    Any egy will do the job provided that it does the above.

  8. #28
    Luq,

    that I believe I get what you're saying , but I look at it otherwise.

    You need to understand your RR in regards to your private expectancy. It is not sufficient to just say, so there is my RR, here's my TP and my SL and I am good to go. No, that is not enough. . .you have to say, according to my own history (or system's history), I believe my expectancy is X%, so , I need an RR of Y in order to be profitable.

    This is where the majority of the confusion is.

    You truly do have to know your RR concerning your expactancy in order to understand if it is worth your campaign.

    I believe what's becoming readily apparent is that the majority of the traders on such forums pull the trigger without actually understanding their RR and necessary expectancy. This would explain why the proportion of profitable traders is low. My guess is that a lot of traders (including some who are posting to the thread) are just counting pips without truly understanding the mechanisms behind their success (or failure).

    Let us take an example...

    The long-term price trend of the EUR/USD is upward (let us say the daily or 4H chart). We attained a top about a month ago around 1.3600. We bottomed out about 1.2900 and are coming back to an uptrend. Now, there's some resistance about 1.3200 to 1.3250. If you should want to trade 1.3250's rest, what do you do? Your upside comes with a max of 350 pips although your drawback can be about 350 pips (major top and major bottom). At this point you have a long-term RR of 1. Based on historic data, you understand that the 50% retracement from a low's break is gt. . .do you choose the transaction? Of course you do, because you understand your expectancy versus your RR. Note this is just an example and is not backed up by any facts that. You can adjust your RR accordingly, but that would make an impact on your expectancy.

    Let us say you wanted to only take 50 pips of the 250 pip move up. However, your confidence level goes up because you believe you have more than sufficient space on the downside (.20 RR = 50:250 = 1:5). Now you understand what your expectancy HAS to be. . .you have to be right 5 times from 6. . .or greater than 83%. . .now, historically, though you had a chance of being right to retest the large, you discover that making 50 pips before retesting a low occurs only 75% of their time. . .do that you spend the trade?? See the Issue? Without being aware expectancy essential to risk the transaction, you see being profitable at THIS system would be dumb-luck. Does this mean the trade itself would be a trade? No, of course not, we examined two or one aspects of trends to determine if the transaction was good.

    Therefore, I think it's important to know your RR, but not always rely on you RR because the end-all-be-all of money management. You absolutely must have a reasonable expectation (through historics or forward testing) of attaining the proper expectancy to match your expected RR. If not, and I seriously mean this, you're just getting lucky (if you're profitable) or you're doing something directly without actually understanding why it is proper. Expectancy can and will change. Expectancies will decline as vulnerabilities are closed and new vulnerabilities will have to be manipulated.

    This is why you have to always be aware of your expectancy AND your RR. Not one or another.

    Quote Originally Posted by ;
    I am with FXTerminator. I am hoping that I really don't misunderstand his points however.

    I am not very familiar with all this matrices. But this is what I know about winning the market.

    We have to make more than we shed ( how clear ). Reduce 100 pips, Win 900 pips. Internet gain 800 pips.

    It isn't important how we do so.
    Either Method
    A - Reduce 100 pips following being wrong 50 occasions, but you should be right 5 times and acquire 900.
    B - Reduce 100 pips following being wrong 5 times, but you should be right 50 occasions and acquire 900.
    (These example looks funny but you get the idea)

    To me, R/R calculation is too blunt. How can anyone quotes Rewards? It is possible to set the risk with appropriate Stop reduction, but rewards? No matter if we use amounts from source that is dubious, how great the math is, the calculation will be useless.

    There's a remedy to our inability to calculate rewards. The so-called
    -cut your losses short (reasonable prevent reduction, proceed SL to break-even if profiting, attempt and reduce Risk)
    -ride in your winners as long as you can. (you attempt to raise Rewards as much as possible)

    R/R thought works intuitively, not quantitatively because there's no good amount to define Rewards.

    Any egy will do the job so long as it does exactly the preceding.

  9. #29
    Quote Originally Posted by ;
    What FXT is saying IS correct, there IS a myth that having a Risk/Reward ratio of 2/1 is necessary.
    Hello mrmikal,

    You are of course right on the money my friend.

    Nowadays it appears you can't open a technical analysis book without reading crap like this:
    Incidentally, just take trades that have a great risk/reward ratio, at least 2/1 or much better, I personnally never trade whether the RR ratio is significantly less than that

    What kind of nonsense is that? Because the trade offers a 2/1 RR it is automatically a good trade??? Since when ???? What if that trade that is great 3/1 has only a 5 percent chance of success you triple idiot?

    Quote Originally Posted by ;
    Using a 2/1 RR is just some arbitrary number that a lot of traders stick by for whatever reason.
    That is precisely the 2/1 RR fantasy I was trying to debunk in that thread.

    Quote Originally Posted by ;
    That is why TP and SL are not your true measurement of Risk Reward.
    Right again. And many traders still fall for this trap.

  10. #30
    Quote Originally Posted by ;
    So in conclusion it doesn't make a difference if you are trading with a 2/1 or 2000/1 risk/reward, the ONLY WAY to make money in the forex (or futures, stocks, etc.. .) Is to have a STATISTICAL EDGE.

    In other words your entrance and exit points must BEAT pure random entry/exit points.
    In my experince, there are different facets deciding wheter you earn money or not...

    what exactly do you mean by STATISTICAL EDGE

    perhaps you meant somthing such as
    The only way to triumph at futures trading is that you be larger (have more positions) when you are right and less rankings whenever you are wrong.

    Http://members.aon.at/tips/moneyMan1.htm


    btw..in this circumstance, nobody has been speaking about random EXIT points....random ENTRY points, yes, however random EXIT points. . .this did not serve as any usefull benchmark

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