There are widely recognized trading pitfalls that traders are often warned to avoid. However, depending on your own personality and trading style, these so-called “mistakes” may actually be considered a form of strategy.
Maybe you believe holding onto a losing trade (within certain parameters) can sometimes be a strategic move. Or perhaps you’ve found that trading “too frequently” works well for you, even though most say it’s a bad idea. Whatever it is, we want to hear about the “mistake” you think is misunderstood!
What’s a commonly perceived trading mistake that you personally think isn’t one?
Trading with a reward-to-risk ratio less than 1.0 (stop-loss distance wider than target).
In the professional trading world, hedge-funds etc., it’s very common and normal, but in forums one often sees people saying they would “never” do it(!), and some even advising others to use an “R” of at least 1:2!!
I’m saying that the common advice that taking a trade with an R under 1.0 is a mistake, is itself mistaken, because those can be very good trades (and some people - among professional traders many people - make a full-time living from them).
My own vary, sometimes a bit more than 1.0, usually less.
The often seen forum perspective, of sticking to 1:2 (reward twice as big as risk) really is horribly bad advice, and is the reason some people fail, IMO.
Hello Jane,
I know being rigid with 1:2 rr has a low chance of working continuously but I find it hard to get my mind around 1:1 winning out in the long run. At least with my experience a big rr once in a while would have to make up for bad trades. Obviously a very high win rate would achieve that but that is where I can’t get my head around (high win rate),
Well done to anybody that can achieve these win rates
J
Among people trading for a living, they’re actually very common.
Like many people, I found it far easier to achieve a 65%-to-70% win-rate with an R of 1.0 than to profit steadily from a higher R. (They’re mostly not people posting in forums though, so the widespread forum view tends to be the opposite one!).
Great win rate, I didn’t know it was so common among real traders, as I always read (first introduced to trading 20 years ago and still only demoing) that the large rr was the only way to come out on top. However my trading education is only part time over those years and not consistent so great to chat to those in the know.
That’s definitely the “widespread forum perspective”. But it varies, even from forum to forum. In beginners’ forums, and on Youtube, I think the popular view is to aim for a high R. In futures-trading forums (where a higher proportion of professional or profitable semi-professional traders hang out), the consensus is more the opposite.
So it’s like everything else: the answer to the question depends on whom you ask!
From my own perspective, actually doing what I do and hitting that win-rate wasn’t difficult at all: the very difficult part was coming to realise and understand that that was the right thing for me to do! I was prompted along that decision-path, though, by people whom I knew to be making a living by trading (i.e. not by anonymous strangers in forums!) and that helped.
I don’t think one can consider R:R in isolation without also relating it to a strategy’s win rate. Afterall, an average win rate of <50% together with an R:R of <1:1 is not going to set the world on fire.
I also think that the most appropriate R:R can be related to the timeframe being used. The higher the TF, e.g. daily or more, the higher the R:R can be if one is a trend trader. Personally, I dwell in the intraday TFs and 1:1 is fine for me with an ave win rate of about 75-80%.
But having said that, I think the whole R:R concept is granted far too great attention. Afterall, there is no relationship between how far the market will move in one direction compared with how far in the opposite direction.
I think it is far wiser to simply think in terms of funds management. When a trade set-up presents itself then determine both the logical TP and SL. If they make sense from a risk/reward POV then enter the trade, if not then bypass it. This is the same principle as R:R but doesn’t get bogged down in percentages or setting TPs and SLs according to maths instead of market structure.
Trade-frequency is also highly relevant to these decisions. (I’m happy to be trading a method with which “little-but-often” trades are available, which also helps to spread the risk, of course, simply by increasing the “sample-size,” to put it in statistical terms).
Interesting. Does this mean that you tend to watch your trades as they evolve or are they more like “set-and-forget”? Bit off-topic but I’m interested.
Taking information at face value, or overthinking.
For example, support/resistance areas are not lines, yet traders are taught to work within and around them. The market doesn’t see lines on a chart, so learn to take a broader look and concentrate on zones. Use your lines only as a visual tool, but if they distract you from the bigger picture then get rid of them altogether.
