Frost, It's a puzzling question, but personally (in my discretionary trading) I've found it almost impossible to achieve the kind of accuracy (>50%) that would be necessary for R:R ratios of 1 or less than 1, whereas it's very possible to take 10 losing trades and then see one huge winner that puts you up for the day. Possible explanations I can think of: - Psychology. One's natural tendency is to let losers run forever while cutting winners early to take profits, and this results in losses overall (if it didn't, then learning to trade would be MUCH easier). Enforcing a high R:R requires you to essentially do the reverse. The market is designed to take profits from the first group, so it should also be designed to give them to the second group. - High R:Rs are "easier." Maybe finding and taking dead-on accurate entries demands a much higher level of skill and experience than riding that occasional huge winner. Therefore, it wouldn't make sense to suggest that newbies go for accuracy right off the bat. I've found this to be the case in my own experience. - Nature of price movement. Perhaps high R:R setups are strongly associated with non-random periods of price movement, making a high R:R/low accuracy system more stable over time, with a smoother equity curve, than one demanding high accuracy. I've observed exactly the same thing you have in my backtesting of automated systems: there's a pretty linear trade-off between accuracy and R:R ratios. However, all the mechanical systems I've ever tested have come back with results that were essentially random, once curve-fitting was eliminated. The trade-off could be a feature of edgeless (random) systems, while profitable systems with a true edge tend to cluster in the region of high R:R. I don't know enough to say, but if you'd like to send me a bunch of profitable systems to analyze, be my guest Obviously, psychology and "easyness" don't really apply to purely mechanical systems.
It does incorporate fundamentals. I've not found it possible to get those kind of odds with purely technical systems. In my experience, trades which have fundamentals, technicals, sentiment, price patterns and valuation all in their favour are the ones with the highest win rate & payoff, and therefore expectancy.
Most profitable traders I've watched trade in person don't bother about r:r. They don't even look at their p/l. All they care is having a good trade and their p/l color will be in the plus side anyway.
Of course there are other factors involved but the black and white aspects that affect R:R in my opinion are the ones i stated. Frequency to me would be the measure of how frequent your strategy can be used based on historic characteristics. The more frequent the most probable which changes the R:R.
{Cutten- "In my experience, trades which have fundamentals, technicals, sentiment, price patterns and valuation all in their favour are the ones with the highest win rate & payoff, and therefore expectancy.") That's been the growling feeling in my belly the last 10 months of trading and learning (yes, I took the cart before the horse). Care to expound on best practices in proceeding ahead from this moment of elightenment (Grasshopper, in order to see the ripple in the water, you must first understand why the water allows itself to ripple...)? I'd be most interested in reading material related to fundamentals, as i've covered lots of technical practices to date, and currently believe price-action study to be the single most relevant pillar. That will take time. Any insights towards solid fundamental background would be appreciated. Wilderman
NeoRio1... Excellent post if I can say so. Much more important is an understatement. Expectancy is (or should be) based on probability. Probability is what causes the dichotomy (and virtual uselessness) of the Win%. You know, 75% losers yet still profitable. There are 2 parts to probability... Probability itself AND expectancy. When both parts are known, risk becomes a sterile and straight forward attribute unrelated to R:R... High profitability with 1:1 or worse! I am not suggesting 1:1 is "the way" to trade... but it is those setups that you want to find. And find YOUR probabilistic edge within those setups. A reminder... many aspects of signals and setups often go overlooked, such as time of day, day of week, limited market participation (such as foreign holidays), if your hair hurts, etc etc etc. All these factors plus many others affect the probability and expectancy of a given setup/signal. Same setup, different probability, different expectancy. Your job is to find the 1:1 and own it! Osorico
It seems that a lot of people get confused about the impact of R/R vs. win ratio. IMO, win ratio is much more important. I am a fully discretionary short-term intraday futures trader. I can't stand 2 losers out of 3 trades while I hope to catch a big winner. I chased this 3 - 1 philosophy for about 5 years. It didn't work for me. I have now realized that many folks take "Market Wizard" type advice such as "make sure you are at 3:1 ratio" (which is really targeted towards longer term trend following as most fund managers and big famous traders tend to perform) and try to adapt it to scalping or intraday. This simply doesn't work. You get stopped out too much in the noise. Or you have to have a 3 point ES stop and that means you need a 12 point ES target. And most folks can't hang on long enough for the big wins. Nor does the market always cooperate for that size move. All I know is, when scaling in/out of my positions, the higher the win ratio %, the better the day. Accuracy and timing does matter. Ringing the cash register quickly on the first 1/2 or 2/3 of the position, tighten up the stop partway and trying to let the rest run for a few more average ticks per trade is what makes repeatable profits. Because in the end, it is all about Net Positive Average Ticks Per Trade. And avoiding the big catastrophic losers that eat it all up.
Interesting thread! For the past six months I was taking profits way too early. On average my average win/average loss ratio was 0.35. However I had a profitability ratio of 75%. As you can see, I wasn't losing money but I wasn't making any either. So I decided to change things. I tried to get my emotions under control and let the winners run. Guess what happened? My profitability ratio declined to the point where again I'm barely breaking even. Avg. win/Avg. loss 1.26, profitability ratio 45%. What now? I guess I need to start looking for a completly new strategy... LL
Reward to Risk is not an important consideration. Risk, however is. Control it and let your winners run with full position on and you will be rewarded. Thank you for your time.
Exits are my next phase to work on, I'm good on entries and risk control, but I'm getting out too early.