Reward Risk Calculation

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

  1. 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?

  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).


    Reward +200
    Risk -100 + -80

    Actual reward:risk 1.11


    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. 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.

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