What Reward to Risk ratio are you using

Beginner Questions
#1

This topic came up in another thread and I thought it needed it’s own thread for a more in-depth look.

Myself being a bit old school have used the tried and true 2 to 1 ratio. For those not sure what this means, I am simply looking for a reward of 2 for every 1 risked. Your winning trade % must also play into this ratio. Someone who wins 75% of their trades can make money with a 0.5 to 1 ratio, while the person who only wins 25% of the time would need a 4 to 1 ratio just to break even. Is there a sweet spot for these ratio’s, is one better than another. I suppose it is going to come down to the individual and their trading style. Longer term traders like myself can look for those 4 to 1 ratios while the scalper or day trader might view that 0.5 to 1 ratio to good to pass up. One also must consider that the market is not like the stagnant conditions of a roulette wheel, as mark conditions change so will your win % and if your ratio does not change as well you could see missed opportunities or account draw downs .

Or are you of the mind set that this is all a bunch of mumbo jumbo that looks good in a book on trading that someone wants to sell you but has little use in the actual trading world.

I look forward to reading what I am sure will be very diverse responses

#2

good thread

in my personal opinion the risk/rewar-ratio depends on 2 things:

your trading style
the market youre trading in

different markets breath different, differtend players play different. but in the end it all comes down to percentage gain so a good R/R-ratio should never be lees then 2:1. whoever tries or says something different will not be around very long to answare the posts people tell him to not use less then “2 reward:1 risk”.

ive seen people here posting 1:1 or people scapling saying that they use 0.5:1 (winning trade 0,5 loosing 1) and ive never heard of them again after a while, simply cause they burned their account and gave up.

noone can have a 100% failprove trade balance where he wins all trades. in fact the smaller time frames you trade the less you win.

A scalper can easily come to 80% loosing trades and only 20% winning, but if he uses a 5:1 RR-ratio he will end up with 0. if he uses a 1:1 RR-ratio he will burn his account very fast.

I personaly use minimum 4:1, if i cant gain 4 times how much i risk i dont enter trades. But my RR usually exceeds 10:1 sometimes in good trades 20:1 simply because i build up on winning trades by scaling in as much as possible. It has the drawdown that winning trades can become loosing ones or be closed at brake even after too much scaling but calculate it this way: with a 50% sucess rate and a RR of 10:1 with scaling in you can make some good pluses.

#3

I am a bit more loose with regards to trades. I trade the lower timeframes and can’ t afford to miss out on break-outs. The trade determines where I will end, but I use strategies where I know I will end on the good side.

For me it is important not to double guess trades, Soo I enter them also when I have my doubts, that is because my doubts aren’t always reliable. So I accept a lower R:R but in return I get discipline. Yes, I trade with scripts but I have to learn that I cannot have the script avoid all exceptions. So I have to except that my entry discipline is high, but the R:R pehaps lower than when I always watch the screens.

So I agree with Turbo, style is an important factor.

#4

This is indeed a very core issue in trading. Maybe even more important than the trading strategy itself.

Underlying this topic of risk/reward is the basic difficulty in defining a strategy for optimally exiting a trade. It is relatively easy to design methods that identify trade entry levels but it is not so easy to design a flexible exit strategy. For example, crossovers and trailing stops give back so much before triggering, especially in fast markets. Fib and pivot levels can sometimes catch a good turn but sometimes the markets just sail straight through them.

So this leads to a practice of relating targets to stops rather than possible length of move in a way that guarantees a net gain if the win/loss probability works out.

But, as has already been said, markets change and different timeframes work in different ways. It is therefore important to gear the R/R to the characteristics of the market and timeframe being used. For example, a 15min TF may regularly and typically move about 15-30 pips before reversing or significantly retracing, but also typically requires a stoploss of at least 15 pips. So there would be little point in seeking a 4:1 R/R in this type of environment as you would lose most trades even though you got the direction right every time.

But longer TFs will typically give much longer moves and can offer greater R/R ratios.

So R/R are not just numbers, they need to intelligently relate to the market to which they are being applied. Whereas the entry strategy is designed to give the trader a probability edge that a majority of trades will succeed - the R/R controls the trades such that the profits exceeds the losses. By managing both these aspects with a strict discipline the trader is most likely to be consistently profitable.

#5

I look for 3:1 minimum.

This is easy as I work pivots back and forth. Using a Median line I can target for the next line and use that to measure. Typically 30 tick max on a 100 tick target.

#6

Another point is that R/R should not be applied too rigidly. If a trader sets a standard R/R of 2:1 for example, then the levels should still be fine-tuned with respect to, for example, recent price action (highs/lows, etc), support and resistance levels from other TFs, Fib levels and whatever else the trader watches and considers important.

In addition, stops and targets should be dynamic and reconsidered as the trade progresses. For example, a stop could be raised to breakeven and the target raised to a new level or swapped into a trailing stop. Or again, if the position has multiple lots, then a portion of a trade can be closed and the rest left with a revised target or trailing stop.