Risk to reward: positive, negative or neutral ?

Discussion in 'Trading' started by Razor, Dec 27, 2006.

  1. Razor


    Hi all,

    This question / poll goes out to futures traders. I have always been curious as to how successful intraday futures traders plan a trade as far as risk to reward us concerned.

    I myself am at the breakeven / looking for consistency stage in my trading. I tend to look for 2/1 r/r (so if stop is 1 point on the ER2 I look for 2 point gain but I go to breakeven after the trade has gone +1 or 1/1 r/r. So yes I am willing to take a breakeven trade even if trade was up 1.9 points. The reason for this is that I know if I can do 2 - 4 trades a day, hit 33% win (+2 points), 33% (breakeven), 34% loss (-1 points) that I can do well. I am still working on my edge and working at achieving the previous ratio; however, I look at it this way. If I flipped a coin and entered a trade in theory 50% of the time it would go +1 in my favour and 50% of the time it would go -1 not in my favour. So in theory my number of stops at -1 should be similar to my breakeven trades (because I go to breakeven after hitting +1). Now I have to rely on my edge to give me the 33% wins at +2 to show me profits over time.

    So 'in theory' the goal is, 3 trades per day avg. 20 trading days per month = 60 trades per month:

    20 wins X 2 = 40 points
    20 breakevens = 0
    20 loses x 1 = 20 points

    so a Net of 20 points per month less commish

    Like I said I am still developing my edge to get me to the above ratio but it is coming

    So can successful futures trades post their style, thank you:

    1) ER2, ES, NQ or YM ?
    2) Avg. trades per day and month
    3) Profit goal and risk per trade (on avg.)
    4) Avg. number of wins per month (percentage wise)
    5) Avg. number of breakevens per month (% wise) , if you take breakevens
    6) Avg. number of loses per month (% wise)


    1) ER2 & ES
    2) 2 - 3 day, 40 - 60 per month (70% on ER2, balance on ES)
    3) +2 profit goal on ER2 with a stop at -1, (ES, about 2.5 and -1.25)
    4) 25%
    5) 35%
    6) 40%


    PS: I had this in the 'Index Futures' forum but decided it may get better exposure here and it is a general trading question :D
  2. Razor


    Is this considered top secret info or something ? :D
  3. You seem to be putting the cart in front of the horse. It would be better to develop a system that you feel comfortable trading, THEN, then apply risk management guidelines to it. Your 2-to-1 reward/risk ratio is "arbitrary". You're not allowing for the possibility of huge profits to accumulate. Try to expand your time horizon and reduce your position size and leverage.
  4. What's with the 50/50 coinflip stuff? Why settle for so little? Why don't you go for 80-90% winners, with 5 to 1 or even 10 to 1 r/r? You won't get there, but if you force yourself to at least try you're bound to find something more effective than your "target" goal right now.

    Agreed w/ nazz, you are going about this backwards. Find what works, and what works best, the actual risk/reward figures as little as they matter will all work themselves out.
  5. Razor


    Hey, thanks for the responses, appreciated :D

    The reason is this: I think it is fair to say that no one can predict what the market will do next; however, if one defines what their goals are when entering a trade then one does not have to predict the market but follow ones plan (assuming one has an edge to achieve the desired results).

    IMHO I don't think I am personally good enough to achieve a 70, 80, 90% win rate and operate on a 1/1 r/r or even negative r/r. I do believe; however, I can get to the point where I can 33% of the time find an entry where I can hit a profit target 2x my initial risk 33% breakeven and 34% a loss.

    IMHO it is easy to say ok, I am in a trade I will trail stop and go for bigger gains; however, what happens when one is in a trade and it goes +1.5 in favour and then goes all the way back to stop and you didnt hit the break even so a winner turns into a loser. Or how about a trade is up 3 points and your risk was 1 point so you are up 3/1, now where do you put the trail stop??......there are so many variables it is mind boggling. If one can get to the point where they are hitting 33% wins at 2/1, 33% breakevens, 34% full 1 stop and taking 2-3 trades per day on something like the ES where building huge size is possible, why put oneself through the mental torture of being up and taking a loser or being up large trying to trail stop and taking a small gain.

    IMHO it is harder to just get in a trade a not know what exactly you will make or lose on this particular trade and know that if you can hit your win rate, loss rate and breakeven rate then you will be profitable consistently.

    Also, I trade futures and having a stop of 1 point on ER and 1.50 or so on ES is about as small as one can go without getting whipped around so trying to achieve 4/1 - 5/1 r/r or more per trade is unrealistic imho as the daily range / swings on most days will not allow this.

    All thoughts welcome :D

  6. Razor


  7. You're target has to be based on something. Just because you have a risk of 1.00 you just can't say I will hold until I have a 2 dollar profit. Where is support? Where is resistance? Can yoiur trading vehicle reach a 2-1 r/r ratio within current support and resistance? Can it reach 3:1 without hitting resistance? etc.
  8. Razor


    Holy Grail, I hear ya, but again, how does one 'know' what the 'actual' support and resistance is, where it will stop, where it will go, point is no one knows period. You could take a long and there is what you think is resistance 1.5 points above but why can't it just pop through .50 - 1.00 passed the resistance point before coming back down. No one knows the actual tick by tick moves of the market so why get stressed about it, just set stop, set target, enter and exit and be done with it :D
  9. Well I'm not a futures trader, but EVERY MARKET has support and resistance. When you trade close to support or resistance your profits will increase dramatically.
  10. Razor


    Yes, ofc I look at what I percieve a support and resistance intraday but what I am saying is for something to move through support and resistance here and there by a few ticks is not uncommon.
    #10     Dec 27, 2006