dropping the bomb

Discussion in 'Trading' started by sporky, Aug 11, 2007.

  1. sporky


    let me go ahead and put it out there, risk/reward ratios are a fallacy. yes? no?

    since i'm new around here I probably should say I've been trading futures over a period of almost 20 years. i've made and lost my fair share. so I am not a newbie.

    many say don't take a trade with less than 3:1 and certainly not less than 2:1. whatever...pick your own numbers.

    now, a basic tenet for any trader should be "anything can happen" (and it usually does, lol). if that's the case how can one realistically measure risk/reward?

    as a day trader, the way i've been doing it is with support/resistance and fib levels. but again, anything can happen and usually does. so, I often think i'm kidding myself when measuring risk/reward.

    in other words, we can know what we are willing to risk, but there is no way to really know what the potential reward is since ANYTHING CAN HAPPEN.

    what say u?
  2. Dustin


    The measure of risk/reward comes with experience. If you are a new trader (not you personally) then you obviously have no idea what the realistic reward is. Risk is defined by your stops so that part is easy.

    For example, in one of my favorite continuation setups I know that once the stock breaks it will likely go at least 1/3rd to 1/2 of the earlier move that day. I know this from reviewing hundreds of past trades.

    An example...if it drops $3 in the first hour of trading, then it will likely go $1-1.5 on a further breakdown. As long as I hold until that goal is met then I am happy with the trade. If it keeps going lower I don't care because my objective was met and I stuck with the plan.

    In my mind that is what risk reward is all about. Someone could also play the reverse of that trade by buying the big losers and stopping out on new lows using the same kind of risk reward. As long as you are right about half of the time but your winners are bigger than losers that's all that matters.
  3. hbiawos


    "what say u?"

    I say you got whipsawed like a lot of us did this past week.

  4. sporky



    the question is beyond what happened this week (or any week)
  5. sporky


    yeah, that's my qualm. "experience" is like "gut feeling," something you can't really quantify.

    risk/reward is supposed to be measured.
  6. The inverse is more important... Since we all agree anything can happen, do you let a sub $1 winner (assuming the market isn't going to fulfill your expectation, or doesn't want to, or you see adverse price action, or, or, or) turn into a loser?

    To a certain degree, trading style dictates the answer. For myself, an intraday index futures trader, cross between a scalper and intraday swing, but closer to scalp, the answer is no! There is another train coming though any minute now. Trading style will also dictate the R/R. Personally, I find the 3:1, 2:1 etc ratios silly. As a scalper, on any given trade I may use 1:1. For other setups, I may not even have a defined target, only defined risk. For fast moving volatile markets, lets see where it goes, again with only defined risk. For something with very high probability, maybe it's 50:1.

    On the surface you may think this sounds like an ad-hoc trade plan, but that is incorrect. Each trade must be able to stand on own, regardless of the setup, market conditions, and price action. It is the containment of risk that determines whether a trade is a good trade or not, not the amount of profit. jmho

    Trade what you see, not what you think
    Osorico :)
  7. ken__0


    Sporky let me give you another heart felt response in your duplicate thread
    Fallacy I believe so since risk managment following your rules levels etc.. is being proactive and thus not leading towards guessing

    Your question is dependent on the traders acct is he playing with his money or someone elses.

    However mr sporky I take the view if your in a current issue thats volitile then a little bit of risk management is being proactive mayb entering only a quarter of what you were
    intending and phasing the rest into or out of it as deemed necessary.
    So instead of a set in stone numerical ratio of risk/reward.
    I believe in a policy of letting the trade/chart and s/r levels dictate the risk/reward or as would label it entry and exits no complex theorys or calculations in that.
    Keeping to your set points of rules ins and outs and not getting into an emotional trade is the way to go

    With these risk/reward numbers you could be going for gold but end up broke. Any stock can fly up or down on any day for any reason, thus reward can not truly be calculated imo
  8. sporky


    sorry for the duplicate. After posting here I saw some of the thread titles here and thought the other forum was better. But hell, i'll maintain both if peeps are interested.

    as for your thoughts, early on I thought scaling in/out would suit me me, but it never has. I'm always all in and out when I deem it necessary. we seem to be on the same page in terms calculating reward.

    again sorry y'all.
  9. " Anything can Happen"

    Well kind of, but I like to place targets using r/s that are meaningful, within the context of the day, deep down day, after breaking supports, all new lows are possible, so way out of range targets are then possible. As an example. Friday, Rimm gaps down at the open, watching the five minute, I look for an entry near the 10 ema, as the stock is clearly in a down trend, so I short at 213.30, fade a few more shares at 213.95, and set my stop above 214.20, as I am using the 10 ema as a kind of moving resistance level to set my stop. I then notice on daily a previous reaction low of 206 after the huge pro gap. So I set my targets on that, with that I now have a r/r of 0.50/7.80 or 1/15.6.

    I have confidence at that point the target will be met due to the large gap down, and there is a midrange support of 209.50/210, but because of the gap down, this support number is now to close to the initial gap so I set my eyes on something lower.

    At that point, 206 I go north, with a target of 210, now a possible pivot or mid range bar resistance. Then playing these numbers for the rest of the day with the mm's as these numbers will be firmly in the minds of the traders that day.

    With knowing the r/r before the trade is entered, only then do I know if it's a worthy trade of my time and energy.

    Of course anything can happen, but their become odds of certain outcomes, due to initial conviction of direction where gaps are concerned.

    And having high r/r then one can have one winner in 20 on a day and still make money.