When calculating risk/reward ratio, isn’t the risk known by virtue of where the stop loss order is places, but the risk is essentially a prediction as you never know actually how much reward you will get (if you reach your limit order goal), but if the trade goes south, you know how much is at risk if a stop is placed.
So isn’t risk/reward essentially an educated guess. Anyone could be off on their reward prediction, right?
Not really sure what you’re asking, but the risk-to-reward ratio is not an educated guess. It is a hard number that is the function of how many pips (or dollar amount) your are willing to give up versus the amount of pips you are targeting to collect before closing the trade.
Both your risk and reward is based on your prediction of the market, so yes those are a guess based on your market direction bias and how far it will go.
I don’t think the risk is a guess. If you place an order and your stop loss is -100 pips the price your order was executed at, then you know your risk is a maximum of 100 pips, it is the most you can lose by virtue of how the stop loss works.
But on the reward side, you can place a limit order for, as you say, your “target” but you have no idea if you will actually achieve that target, so your reward is essentially a guess. If you profit at only 50% your target you used in your risk reward calculation (usually by use of a trailing stop) , then your RR calc was off by double.
The reason I bring the subject up is the way RR ratio is portrayed in the educational material of most websites (at least in my opinion) is that it gives it more of an appearance of a fixed/concrete number, when it is not at all - it’s really a guesstimate because you can fix your risk via the stop loss, but you can’t fix your profit since you don’t know for sure how much profit you’ll actually make, or even potentially can make - it’s a guess.
Ah I think I understand your question a bit more, as you have defined the trading style.
If you were the type of trader to just pick a stop and target, and just ride it out until either is hit, then you will have a “fixed/concrete” RR ratio.
If you use trailing stops, or any other “scaling” technique, then that will change the statistical outlook of your system. With that style of trading, you can’t have a hard number for your risk-to-reward ratio. You may have some trades with a RR ratio > 1, and some with a RR ratio < 1, so the best way to perceive your RR ratio is as an “average” RR ratio over time or given sample set of trades.
With this “average” RR ratio, then you can adjust your position size to forecast your potential long term profitability goals and risk management plans.
I wouldnt worry too much about the R:R ratio, when you develop a well defined trading strategy, when you enter a trade you will have a pretty good idea of where you will end up.
Of course you might not get there, so really you need to focus on letting your winners run and cutting your losers short. Try to remove the risk out of your trade as soon as possible, I try to move my SL as soon as I’m up a certain # of pips and then its a free trade.
Maybe half of my trades come back to get stopped out just above b/e and the other half go onto to the TP level.