What part, in your opinion, does the risk/reward ratio play in your decision-making process, and how do you balance risk and potential financial gain?
The risk/reward ratio has to be evaluated together with the probability of winning versus losing. Would you take a bet where the payoff is 20 to 1 against you? In other words, if you win, you win $1, but if you lose, you have to pay the other guy $20? If you can win that bet 98% of the time, it's actually a pretty good play. But if you only win 94% of the time, it's a loser.
Agreed. We have a scanner where you can rank the Reward:Risk and POP% together to find the top trades for this tradeoff: https://gyazo.com/d88ccd5967bec5a26529011682679acc
What a coincidence: in recent days I had planned to study a similar issue: high volatility vs low volatility and how it affects risk/reward and the result etc... (in my case primarily for options trading).
Meh,it's all the same to me. My risk per trade is dictated by my trading account size. I will say this though. If a slam dunk,5 star set-up falls in my lap I will put the pedal to the metal with a larger position size on that trade.
there is no risk reward ratio in my book, only profit targets. let my account size to buffer the drawdown. any predefined ratio is just a gamble, not conviction.
Only Profit Targets ? You forgot about the margin call Unless you have more than 220K for trading ES with 1 lot.
Risk Reward plays an important role. Because I want the tape to be biased in my favor. If you toss an unfair coin with probability of head (80%) and tail (20%) Then the probability of 5 consecutive heads is 33% and tails is 0.03% In my opinion ... If I have a poor Reward to Risk (MFE/MAE) then I have zero edge. Why ? Because the underlying instrument is simply into a random walk. I don't want to take a random bet against a fair coin. Reward to Risk is a consequence of an asymmetric probability distribution. If the market has 60% chance to make an Uptick then ... 1. You'll more likely win than lose by buying (%) 2. You'll likely win more than lose ($) "Don't fight the tape"
Risk/reward ratio (which is really reward/risk) is meaningless to me. Market doesn't know or care, so why should I. Put a trade on, stop in place and let price action do the rest. Where I will exit (with a profit or loss) price action will determine. Not some silly R/R factor. edit: just now see your post above mervyn which I agree completely with.
never forget margin, default 4x by the broker, better use it by selling options. don’t know where you get the es numbers. i just have a fixed dollar amount i want to get each day.