Money/risk management. What is proper money/risk management? That depends on your trading style, your goal, how capable you are of handling a draw down, ... The end goal is a positive expectancy.
How does a trader calculate his reward? Either we go with the says that we can't predict the future or we can also predict our reword... These 2 phrases can't coexist. It is better and easier to try to figure the chance of breakeven trade (The best trade in the world). The trader manages the risk( lose ) -> the market will take care of the reword.
How can a trader calculate his reward? Easy ... Once i see a valid signal, i look where my strategy dictates me to place my stop and depending on the distance of the stop, i know my maximum size. Lets say my stop is 4 points in ES or $200. My minimum reward that i would be looking for is 1.5 times my risk, so $300 or 6 points. If my account is $100k and i am willing to risk 1%, that would mean my position would be 5 contracts. Potential loss $1000, potential minimal reward $1500. And i don't need to look into the future to do that, i look at the past. I look back at the past performance of my strategy, the statistics that i have collected about my strategy. Those statistics also allow me to move my target further away, if momentum is picking up, or closing the trade earlier if the market isn't going anywhere. But by analyzing my strategy, playing around with testing different levels of risk:reward, i know 1:1.5 is the sweet spot for me to start with and adjust depending on market conditions, however it is extremely rare for me to go below 1.5, my average YTD is well over 1.5. That has nothing to do with predicting the future, that is called trading a strategy. Basically, i don't base my potential reward of my next trade on some voodoo shit or by looking in a crystal ball, but on where my stop will be placed combined with the size i will trade and my stop will never be bigger than for example 1% of my balance.
I day/scalp trade on momentum. I know when there is strong momentum on the market I trade. I just don't know how long that will stay strong or disappear, and I can't predict the number of ticks I will get. Every day, I make the following analysis: - Where my hard stop should have been, to not being canceled, except on reversals (MAE) - Where could have been my best exit during my trade (MFE) - Where could have been my best exit (I just look at my charts) This was the only way for me to bring back my risk/reward ratio from 2.75 to 1, to 1.67 to 1. I could improve this ratio but my win rate will suffer without any gain, and below 1.33 to 1, my PnL will be greatly affected. There are unusual contexts (about 6 times a month on average), when I have to have larger stops. When that happens, 50% of my exit will still be at 2.5 to 1 and the remaining will be near a specific area, which bring half of my exit between 1.25 to 1 and 0.75 to 1. Those are the most difficult trades as I am always temped to breakeven them, after my first exit. So, at the end, yes my risk/reward ratio is exactly the opposite of what is usually taught. No close stops at all. It works for me.
Hello p0box4, Good discussion on Risk vs Reward. I would agree that managing the risk vs reward from a discretionary trading approach is the upmost challenging part of discretionary trading. I indeed struggle with it, because mentally and personally I like a high win rate +60%, but I know that requires risk>reward for me. We all would LOVE to be fixed profit target and fixed stop loss in manually discretionary trading, but with my experience, that does not work well, different market conditions will not let us get away with that.
I believe it's also question of trading stayle. If I want to benefit from the opening volatility I just need to catch the direction. By definition in the voltility hour if I catch the direction I will be rewarded.