Help me refine my strategies' risk/reward

Discussion in 'Trading' started by wiesman02, Nov 18, 2007.

  1. So as you all know, I'm that one of 'those' that hopes to trade fulltime in the not too distant future.

    My strategy revolves around gap ups / downs, and no trades before 9:50 (4th 5 min candle) unless a rare circumstance arises.

    My trades usually last no more than 20 mins. If it lasts more than 20, I'm riding an uptrend.

    Each position thus far is either $20k, or 1000 shares (for stocks under $20). This position sizing method is not set in stone as I'm still deciding on the best way to size my trades. But thus far, we're going with $20k positions.

    PROFIT Target: $200. Soon as price its $200 profit target, I sell 1/2 and let the winner ride.

    Stop loss: $200 or when 20 mins has elapsed and I'm down between 0-$200.

    POTENTIAL PROBLEM: My average winner is btwn $225-$275.

    This means my risk / reward ratio is not 2:1 or 3:1.

    Are these horrible rules ? Maybe, but its a work in progress and I'm absolutely open to ideas. If you guys need more info regarding my strategy, I'll be more than willing to divulge, I just need some help. Will this risk to reward ratio guarantee me a losing trader ?

    I've been tracking it the entire month of October and November thus far, and on average it yields me 25 entries per day. I won't catch every entry, but I'm assuming 15-25 I will catch at least. I've never had more losers than winners, and the average is about 14 - 9 - 1 , 1 being $0 loss.

    Help ? suggestions ?
  2. Your exit is totally random and not based on the price. You're not working hard enough at figuring out when the price tells you to exit, which can be after $20 or $2000. Arbitrary targets aren't good... same with your stops. $200 is a bad stop without a reason for why you should have to give $200 to the market to be proven wrong. To refine it, have stops based on support levels and targets based on resistance (this for longs, reverse for shorts) and/or don't use targets at all but instead react when the price action changes and hints at a potential trend change.
  3. maxpi


    Reward to Risk is very much related to percentage of winning trades... a system can have 40% winners and reward to risk of about 3 or 85% winners and 1 to 1 RR and have about the same net effect over time, the latter system would generate a smoother equity curve however...
  4. telozo


    The guy plans to hold his positions for 20 minutes, and trade 10-15 stocks at a time. How do you monitor all of them for support/resistance? I think, from a practical point of view, a price target/stop is better, as it can easily be automated, provided that the entire strategy has positive expectancy.

  5. My strategy involves buying after resistance breaks, and shorting after support breaks.

    So far I have a few entries that involve bollinger bands, but we'll save that discussion for another time but the same logic applies.

    I suppose you are correct in not having arbitrary stops. My goal is to make sure my risk / reward ratio is 2:1 or higher so that I can 'stay in the game'. So far I'm at about 1.5 / 1 and thats in only 2 months when the market has been volatile. My current strategy, thus far, is definitely profitable, but its level of profitability will be strongly dependent on my exit plan.

    I am going to log all my winners daily, and work on developing a tighter stop relative to the volatility of the stock. The volatility of one stock will be quite different than that of another, and setting an arbitrary $200 stop, in hindsight now, seems ridiculous.

    I guess my option for a plan going forward is to set a stop somewhere along the resistance area if I'm going long and support area if going short. Where that will be will be dependent on what price action tells me.

    Note: By 10:00, I have 15-20 stocks in my list. I'm usually not trading any more than 3 stocks at at a time as I'm only given about 20-30 entries on any given day and I usually miss 15-20% of them. My usual hold time is closer to 10-15 mins. But can go over 20.
  6. W,

    Your entry, your stop and your exit should be based on price action.

    You are limiting your losers but your winners as well. Big mistake here imho.

    You exit when price tells you to exit not because you are content with the target.

    My 02 cents.

  7. Anek, thank you for the tip. I've studied price action, studied my strategy, and I've realized its too restricting.

    I've kept parts of my strategy but no longer consider it a 'strategy'. They are only entries that I will add to my arsenal that I feel have an edge.

    In terms of risk / reward, I've thrown out the idea of $200 price targets and price stops. I've studied my entries, and developed new ones. I've realized that my exits will only be determined by price action, although I will still keep a mental stop of $200 in mind. From my trading, I've seen that the 2:1 risk/reward ratio is a lot easier to reach by discretionary exits based on price action.

    Again, thanks for the tip. It has helped me to grow as a trader ever so slightly.