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# Reward Risk Calculation

Discussion in 'Strategy Building' started by chinook, Sep 23, 2003.

1. ### chinook

I think you can do this in more than one way. I'm keeping track of my P/L and Risk(initial entry stop) for each trade in a day. Let's say I made the following trades, commissions included:

1) P/L=-100 , Entry Stop=120, R/R=-0.5
2) P/L=200, Entry Stop=80, R/R=2.5
3) P/L=-80, Entry Stop=120 , R/R=-0.67

My total "Reward"=-100+200-80=20
Total "Risk" = 120+80+120=320

Reward/risk for the day = 20/320 = 1/16 = 0.063

I think the above calculation sums up the trading performance quite well for a day in terms of \$\$\$ "invested":
Total reward/ Total Risk. I prefer this calculation.

Calculation below might be more common
Reward/risk average per trade = (-0.5+2.5-0.67)/3=0.44

Any thought?

Chinook

2. ### acrary

It looks to me like you're mixing the theoretical and actual risk. How can you use the theoretical risk on the risk side and the actual risk on the reward side?

I think it makes more sense to figure reward:risk on either a theoretical or actual basis (or compare using both).

Actual

Reward +200
Risk -100 + -80

Actual reward:risk 1.11

Theoretical

Reward (is \$200 the reward on each winning trade? If so, \$600 would be the theoretical reward)
Risk -320

Theoretical reward:risk 1.88

3. ### chinook

Acrary,

Thanks for your post. I see your point and we both agree on the actual reward. When I open a position, my protective stop order (risk) is already pending at the exchange. That's why I see it as the actual risk taken, since it's already out there.

Chinook

4. ### hypostomus

Personally I prefer to use the last drawdown divided into the profit run which preceded it.

5. ### Swish

You should only use hypothetical risk when calculating share size, which becomes actual risk except for slippage while the trade is open.

But to calculate sharpe ratio, which is done for closed trades, you do the following:

average winner / average loser

(\$ basis, not points)

average loser may be different than risk/trade due to trailing stops, early closes, etc.

In addition, Ryan Jones has a concept in "The Trading Game" called positive expectancy - which normalizes batting average and sharpe ratio across the spectrum of combinations - very helpful to me.

6. ### Swish

Probably shouldn't calculate on a daily basis, but on a larger group of trades. I calculate for individual strategies every batch of 20 trades or so.....

7. ### chinook

It looks like everyone is doing it in a dfferent way. Thanks for the suggestions.

Chinook

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