New risk management technique

Trading Discussion Risk Management Practices
#1

Hi,

I’m not aware of this method already being shared here on the internet but I’m certain the idea has already been put out there.

I’m messaging here to share the idea for feedback. It’s easy to get blindsided by an idea and then fail to see its flaws.

Simply, all it is is increasing the risk-to-reward ratio after every loss.

I thought about when I was exploring other risk management techniques, such as Martingale and dollar cost averaging. I personally wouldn’t use either of these techniques because of the risks associated with them.

But my idea is to trade as normal, i.e. find the best and most likely setups. Set the initial risk to reward as 1:1.

If that trade loses, the next trade will aim for 1:2.

If that trade loses, the next trade will aim for 1:3. And so on.

The idea is that you recoup the losses, plus come out with a full return.

Once the target has been hit, you start back at 1:1 risk reward again. Obviously, you can go on a winning streak to build your account, and if you do get any losses, they are made up in the subsequent trades.

The only real weakness I can see with this is a continuous losing streak, where the risk-reward then becomes massive. I can see this would also add pressure to your trades.

However, to attain a big win at some point is not so difficult, and if you just let each trade run until its target, often the price goes parabolic and would hit any target.

Any feedback would be appreciated.

Cheers

Des

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#2

It does make sense in general to me. But, sometimes it’s a bit unrealistic depending on the context. Anyway, I assumed that you have test it and it works for you. Good.

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#3

My assumption is exactly the opposite: he can’t possibly have tested it at all (otherwise he would already know that it can’t work, and maybe even have some idea why).

4 Likes
#4

Hi,

The thing is that we, as traders, need to take a systematic approach where each trade is independently taken and closed.
In the money management plan you describe, there is no market data-based evidence that can support your idea. It seems to be only for taking kind of revenge to make up for the loss.
Unfortunately, the market has nothing to do with our results and performance and we need to stick to the market data-based analysis.

Cheers

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#5

Yeah I think I get you mean. It seems like an average down kind of style money management which I don’t really like also. I prefer price become more and more expensive or vice versa to confirm that the trend indeed is valid.

#6

The concept presented is intriguing. Nevertheless, it’s crucial to acknowledge the necessity of imposing a CAP on the risk-reward ratio at a certain point. Without such a cap, the likelihood of achieving higher risk-reward ratios becomes insane. My suggestion is to introduce a cap at a risk-reward ratio of 1:2.5.

Here’s a proposed sequential approach:

  • Level 1 - 1:1
  • Level 2 - 1:1.5
  • Level 3 - 1:2.5

Should you encounter persistent losses at Level 3 (1:2.5), it might be prudent to just bite the bullet and abstain from further escalating the risk.

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#7

Well, I had 13 consecutive losses on 13 different currency pairs one day. I would suggest that it would be highly unlikely that an increasing T/P would be hit.

However, if you aim to use price action to determine where a T/P is likely to be met, you could place a S/L accordingly. In other words the critical set up is where to place the T/P, not the S/L.

So, with regret, I cannot see your idea as being anywhere near plausible.

best of luck.

1 Like
#8

Increasing r:r is similar to a novice’s gambling tactic in betting.

So in a horse race you start by laying a bet on a horse to win at odds of 2-1. If he loses, you bet on the horse in the next race which is at 5-1. If he loses you bet on a horse in the next race who is at 10-1. Pretty soon you are betting on a horse at 100-1. But seriously, how often will a horse which is a 100-1 rank outsider win a race?

I think this is a tactic which makes for a really fun afternoon at the races and I have dabbled with it when betting on the gee-gees online. But it’s not a serious money-earning plan.

4 Likes
#9

I think this is still the martingale strategy. And how I so dislike this strategy. It’s moreso trying to revenge the market.

Just as I’ve come to learn here in this forum and I’ve come to agree :100: that it’s unrealistic to have your rrr fixated at 1:2 let alone 1:3.

If you lost your first set, there’s no need to increase your rrr, just stick to your strategy and if the losses continues, just bow out of the market and take a chill pill.

That’s my 2 cents.:relaxed:

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#10

It seems to have plenty to do with mine.

1 Like