Failure to understand risk/reward and why you're losing as a trader.

SunTrader · Jan 10, 2025

I am a firm believer in letting winning trades run but not by using a silly R/R formula.

Price does what it wants to and I just follow till it changes its mind.

2rosy · Jan 10, 2025

look into poker pot odds and implied odds.

MACD · Jan 10, 2025

schizo said:
He's like those attention whores who like to argue for argument's sake.
More...

Bravo -- Good Post

wxytrader · Jan 10, 2025

Again, quit comparing it to poker...rw...win rate etc None of you has the stats to support calculating your risk reward. All you're doing is guessing at where price can go based on some rudimentary TA.

Saying you're risking $500 but if price hits your target you make $1000 is not a 1:2 rw...it's risking $500...that's it.

rb7 · Jan 10, 2025

Laissez Faire said:
Hello everyone,

Regardless of what methodology you use, be it very sophisticated or very simple, you can't escape the mathematics of expectancy. Your broker doesn't care about your method, win % or whatever. He simply tallies your wins and losses and it's either a red number or a black number.

Simply put: "You need to make more money than you lose - on balance".

Simple, right? Yet, I'm convinced this very fundamental truth is something many would be traders miss or at least don't pay sufficient attention to.

Generally, making more money than you lose is achieved in one of two ways:

a. A higher win % system where your average winner and loser each is around the same size, i.e., risk 1 to gain 1.

Excluding commissions, a system with equal winners/losers would breakeven with a 50 % win rate. Including commissions, you'd need at least a 60 % win rate to get anywhere, but you're still not going anywhere fast. With a 70 % win rate it's looking better.

These systems are typically associated with scalping and very short term trading.

In practice, however, most scalpers seem to risk more than they stand to gain, i.e., risk 2 to gain 1.

Such a system would need a 67 % (!) win rate just to breakeven - excluding commissions. Including commissions, your required win rate is around 80 %.

Let that sink in...

-

b. A lower win % system where your average winner is at least twice your average risk, i.e., you risk 1 to gain 2. Compared to the prior system, this can actually make money with a 50 % win rate. If you can risk 1 and gain 10 or 20 - even better! Then your win rate can drop way below 50 %.

This is more easily accomplished with swing trading, but can definitely work on any time frame.

So, which system is better? How should you trade?

I'd like to say both could work or are equally good, but I have to say I feel system b. is superior and a smarter way to approach your trading as it's really the essence of the timeless trading adage: "Ride your winners and cut your losses." I mean - who wouldn't want to gain more than he risked?

Regardless, the important thing here is to really understand the math of risk/reward and what it is you're trying to do and how a few simple adjustments could make a big difference.

Know that if you're scalping you probably need a VERY high win rate to get ahead. Can you achieve that long term?

Know that if your win rate is lower, you need to make sure you put in a profit target at least twice your stop. It's really that simple.

Why am I making this thread?

Well, let's just say that I was embarrassingly slow to grasp this concept myself and I had some help to nudge me in the right direction. My focus was on methodology which of course is also important, but if you don't put the proper risk/reward metrics and risk management in place, no method will help you.

You can't beat the market or outtrade the market by being a superior trader. But you can control your risk and you can let your winners run.

I'm attaching two videos on the subject which are really, really good.

GoodLifeTrader - Making Billions - Risk/Reward

Risk Reward Part 2
More...

It's probably why most traders are losing money. They're aiming for a high win rate with a low R:R. They cut their winners fast and let their losers go, hoping they will reverse. Those guys are making money until they get a couples of bad consecutive trades and blow out.

Real Money · Jan 10, 2025

You can get a better R/R by using options and futures spreads, and by trading ratios of securities (using vol and correlation).

Basically, with spread risk, you can take more leverage.

Drawdown Addict · Jan 10, 2025

newwurldmn said:
whats wrong with gypsies.
More...

Nothing, I am one.

Frederick Foresight · Jan 10, 2025

Laissez Faire said:
Simply put: "You need to make more money than you lose - on balance".
More...

What? No! That can't possibly be right.

Picaso · Jan 10, 2025

Basically, I agree with @Laissez Faire.

That said:

1) There are many ways to make (or lose) money trading, to each its own.

2) In my view the most important metric is the "sitting" ratio

Best trading to all

PPC · Jan 10, 2025

Laissez Faire said:
Hello everyone,

Regardless of what methodology you use, be it very sophisticated or very simple, you can't escape the mathematics of expectancy. Your broker doesn't care about your method, win % or whatever. He simply tallies your wins and losses and it's either a red number or a black number.

Simply put: "You need to make more money than you lose - on balance".

Simple, right? Yet, I'm convinced this very fundamental truth is something many would be traders miss or at least don't pay sufficient attention to.

Generally, making more money than you lose is achieved in one of two ways:

a. A higher win % system where your average winner and loser each is around the same size, i.e., risk 1 to gain 1.

Excluding commissions, a system with equal winners/losers would breakeven with a 50 % win rate. Including commissions, you'd need at least a 60 % win rate to get anywhere, but you're still not going anywhere fast. With a 70 % win rate it's looking better.

These systems are typically associated with scalping and very short term trading.

In practice, however, most scalpers seem to risk more than they stand to gain, i.e., risk 2 to gain 1.

Such a system would need a 67 % (!) win rate just to breakeven - excluding commissions. Including commissions, your required win rate is around 80 %.

Let that sink in...

-

b. A lower win % system where your average winner is at least twice your average risk, i.e., you risk 1 to gain 2. Compared to the prior system, this can actually make money with a 50 % win rate. If you can risk 1 and gain 10 or 20 - even better! Then your win rate can drop way below 50 %.

This is more easily accomplished with swing trading, but can definitely work on any time frame.

So, which system is better? How should you trade?

I'd like to say both could work or are equally good, but I have to say I feel system b. is superior and a smarter way to approach your trading as it's really the essence of the timeless trading adage: "Ride your winners and cut your losses." I mean - who wouldn't want to gain more than he risked?

Regardless, the important thing here is to really understand the math of risk/reward and what it is you're trying to do and how a few simple adjustments could make a big difference.

Know that if you're scalping you probably need a VERY high win rate to get ahead. Can you achieve that long term?

Know that if your win rate is lower, you need to make sure you put in a profit target at least twice your stop. It's really that simple.

Why am I making this thread?

Well, let's just say that I was embarrassingly slow to grasp this concept myself and I had some help to nudge me in the right direction. My focus was on methodology which of course is also important, but if you don't put the proper risk/reward metrics and risk management in place, no method will help you.

You can't beat the market or outtrade the market by being a superior trader. But you can control your risk and you can let your winners run.

I'm attaching two videos on the subject which are really, really good.

GoodLifeTrader - Making Billions - Risk/Reward

Risk Reward Part 2
More...

True, however, expectancy is only part of the equation. One must also consider the frequency of trade opportunities and execution errors, as these factors do influence the P/L quite a lot.