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1:1 Risk/Reward Frowned Upon?

  • #41
  • Feb 5, 2021 1:23pm Feb 5, 2021 1:23pm
Trader: - I want to use 1:5 RR
Market: - Ok, why not! Done! Why not 1:10? May I can make 1:10 for you?
Trader: - No thanks, 1:5 will be ok!
Market: - As you wish, master! You are the trader here.
Observer effect
  • #42
  • Feb 5, 2021 2:27pm Feb 5, 2021 2:27pm
I thought I might interject another idea into this discussion. One in which very few know about or even calculate or use. Since the entire idea of R:R is profitability perhaps one should consider this...which is the long the same lines. Cash Ratio: This is the Total Gains/Total Losses; and it should be a positive number greater than 1. This is along the same lines as a R:R of 1:1. It simply means that for every dollar (or Euro, or what ever your home currency is) you lose...you win back. For example f you have a Cash ratio of 2, it means that for every dollar you lose, you gain back two. Thus the higher your cash ratio is...the more profitable your trading is. This is independent of R:R and shows with greater ease if you are truly doing well or not.

I use both, but NOT as a tool to execute on...rather as a measure of the efficiency and profitability of my trading. A R:R number of any size does not tell the true story of how well your method works. It is only one measure. Here are some things R:R does NOT account for:

  1. Profit taken before hitting R:R target (usually because price just isn't going there)
  2. Stops cut short (why lose 25 pips when you only have to lose 10?)
  3. Stop and Reverse trading techniques that can be employed to preserve small profits or also keep losses smaller.

Here are a few screen shots from my own trading log that illustrate this simple concept:
As you can see the accuracy rate is just as important to your profitability as R:R (Duh)...but also depending how you size your contracts your R:R differs when you measure in cash or in points (pips). Here the Cash R:R is 2.2 where as the points R:R is 3.8. What accounts for the difference? Position sizing, and how far against your trade you are willing to let a contrary price movement go before you close the trade. Not every one of these trades made the target, but that kept profitability on target.

The point I'm trying to make here is the Cash ratio (at the bottom: So far this year for me (and admittedly its only a month), for every dollar I lose I make 12.54 back. So even if my R:R is only 2.2 or less on some trades, the profitability overall is high. And really...lets think long and hard about this...are we in this business to have good math skills? or to be profitable?

R:R by itself means nothing. Trade accuracy by itself means nothing. Profitability is the whole point of this exercise. Lets keep our eye on the ball

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  • #43
  • Feb 5, 2021 10:54pm Feb 5, 2021 10:54pm
Quoting DonPato
I thought I might interject another idea into this discussion. One in which very few know about or even calculate or use. Since the entire idea of R:R is profitability perhaps one should consider this...which is the long the same lines. Cash Ratio: This is the Total Gains/Total Losses; and it should be a positive number greater than 1. This is along the same lines as a R:R of 1:1. It simply means that for every dollar (or Euro, or what ever your home currency is) you lose...you win back. For example f you have a Cash ratio of 2, it means that for...
Is there an indicator that will do this for us instead of RR? Very interesting stuff!
  • #44
  • Feb 6, 2021 9:57am Feb 6, 2021 9:57am
Quoting ccrkk10
Hello all. It seems that the trading community as a whole is widely against using a 1:1 risk/reward ratio and constantly preaches to aim for at least a 2:1 ratio whether it be on forums, youtube videos, chat rooms etc. I recently started thinking why is this the case? I personally come from a blackjack card counting background. At the very best counters will get a 3% edge over the casino (win about 53% of the time). Sports bettors are considered amazing if they can hit at a 55% rate and are legendary if they can get 60%. There are plenty of people...
You have conflated two very different topics here: R:R and win rate. These 2 things are not the same nor are they related to each other, although they definitely contribute to your profitability. Let's stick with R:R which is the basis of your question. Every trade set up has a different R:R opportunity, and the key to determining the R:R is your ability to 1. Understand what is going on in the forex, and 2. Read a chart. If you don't understand what is happening in the market, you can't understand how to read a chart. If you can't read a chart, the discussion on R:R is a total waste of time. The foundation of measuring risk, and estimating the potential reward, can only come about with some objective understanding of the market, the tendencies of the key players in the market, etc. Without objective knowledge, your R:R estimate is subjective, and subjective is another word for a wild guess. If you guess, you lose. So, a R:R of 1:1, if based on objective understanding of the forex, is just fine. A subjective R:R of 1:1 or 1:10 is about equal, in that you are going to realize the risk and rarely the reward.

If you have a set up with an objective R:R of 1:1, I'd take it, but would probably not plan to add on the the trade. What I really want is a 1:3 or 1:5 type of set up. That way, if the R:R is 1:3, I can plan/look for opportunities to add positions to the initial trade to capture as many pips in the move as possible, turning, say, a 75 pip move into 100 or 150 pips, by risking only 25 pips on the first trade.

Win rate is your ability to select the trades from the universe of trade set ups you encounter each day. If your win rate is poor, you can improve it by analyzing the quality of your set ups, and analyzing the process you use to select trades out of the set ups the market presents to you aech day. For example, if you find you have developed good skills at objectively analyzing the market and the charts, and are good at qualifying good vs not so good set ups, but allow emotion to overwhelm your rational mind and take trades that essentially have no where to go, then you know what to work on to improve your trading.
  • #45
  • Feb 6, 2021 11:05am Feb 6, 2021 11:05am
Quoting GEfx
{quote} You have conflated two very different topics here: R:R and win rate. These 2 things are not the same nor are they related to each other, although they definitely contribute to your profitability. Let's stick with R:R which is the basis of your question. Every trade set up has a different R:R opportunity, and the key to determining the R:R is your ability to 1. Understand what is going on in the forex, and 2. Read a chart. If you don't understand what is happening in the market, you can't understand how to read a chart. If you can't read...
Hey GE,

I normally agree with most of what you say; but it's also a mathematical fact that for each new setup/trade, there's a probabilistic relation between its R:R and the possible win-loss outcome.

Cheers!
  • #46
  • Feb 6, 2021 11:35am Feb 6, 2021 11:35am
Quoting GEfx
{quote} You have conflated two very different topics here: R:R and win rate. These 2 things are not the same nor are they related to each other, although they definitely contribute to your profitability. Let's stick with R:R which is the basis of your question. Every trade set up has a different R:R opportunity, and the key to determining the R:R is your ability to 1. Understand what is going on in the forex, and 2. Read a chart. If you don't understand what is happening in the market, you can't understand how to read a chart. If you can't read...
I'm well aware of the difference between risk to reward and win rate hahaha. I completely agree with your thinking about pyramiding into a position and it's also something I've done in my trading. Personally I'm looking for at least 2:1 for my trades and depending on the market will let half of the position run. The issue I'm having is the fact that people in the trading community act like having a 1:1 RR with a 55% win rate is a bad system, when in fact it's crazy profitable. It just seems that what I've seen as a whole is everyone's benchmark should be a 2:1 RR hitting at around 50%. This is complete BS lol. If this was realistic everyone trading a system like this would be a billionaire.
  • #47
  • Feb 6, 2021 12:15pm Feb 6, 2021 12:15pm
Quoting DonPato
I thought I might interject another idea into this discussion. One in which very few know about or even calculate or use. Since the entire idea of R:R is profitability perhaps one should consider this...which is the long the same lines. Cash Ratio: This is the Total Gains/Total Losses; and it should be a positive number greater than 1. This is along the same lines as a R:R of 1:1. It simply means that for every dollar (or Euro, or what ever your home currency is) you lose...you win back. For example f you have a Cash ratio of 2, it means that for...
Exactly, and thats why, like i said before, you can never be sure how much the market its going to move in your favor; anyone is a fool if he thinks that will make it exactly "x" amount of pips/points/R:R as profit.. period

what you make or lose per trade and the accumulation of this results its what matters in the long run !!


R:R its a myth and needs to die and burn in hell already, thats a stupid and noob way to view the trading activity !!


Also moving your Stop loss or closing a trade in profit at a different "R:R" is a stupid powerful tool once you know why and how to do it and can boost your account to the moon in no time
  • #48
  • Feb 6, 2021 12:34pm Feb 6, 2021 12:34pm
It all depends on your strat. For beginners it is probably easier to profit at 2:1 thats why people are so biased at this kind of rr. I do a strat with 2:3 rr with 90% hit rate. It works fine.
  • #49
  • Feb 6, 2021 1:44pm Feb 6, 2021 1:44pm
Quoting bojack34
{quote} Is there an indicator that will do this for us instead of RR? Very interesting stuff!
Yes!! It's called a "spreadsheet". I use excel but there are many others.
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  • #50
  • Feb 6, 2021 3:29pm Feb 6, 2021 3:29pm
Quoting Viktory
{quote} Hey GE, I normally agree with most of what you say; but it's also a mathematical fact that for each new setup/trade, there's a probabilistic relation between its R:R and the possible win-loss outcome. Cheers!
Hi Viktory hope you're having a good weekend.
Let me unpack my comment a bit. Chart structure determine R:R. Whatever real estate is available on the chart, and where ever the chart says is your stop, represent R:R. Set ups are found in PA within the structure, and trades are those set ups that match market narrative, structure and PA. So win-loss is a function of a structure, narrative and PA, and R:R a function of structure. So yes, you are right that there is relationship between R:R and win-loss in structure. Well done and I gladly stand corrected!
  • #51
  • Feb 6, 2021 4:07pm Feb 6, 2021 4:07pm
Quoting GEfx
{quote} Hi Viktory hope you're having a good weekend. Let me unpack my comment a bit. Chart structure determine R:R. Whatever real estate is available on the chart, and where ever the chart says is your stop, represent R:R. Set ups are found in PA within the structure, and trades are those set ups that match market narrative, structure and PA. So win-loss is a function of a structure, narrative and PA, and R:R a function of structure. So yes, you are right that there is relationship between R:R and win-loss in structure. Well done and I gladly stand...
Well said!!
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  • #52
  • Feb 6, 2021 6:22pm Feb 6, 2021 6:22pm
Quoting GEfx
The foundation of measuring risk, and estimating the potential reward, can only come about with some objective understanding of the market, the tendencies of the key players in the market, etc. Without objective knowledge, your R:R estimate is subjective, and subjective is another word for a wild guess. If you guess, you lose.
Win rate and RR aside this is your main message that most members ignore. The importance of objective and subjective.
Know what you trade
  • #53
  • Edited 4:12am Feb 7, 2021 3:59am | Edited 4:12am
I don't think any of us can escape math, no matter if we trade using Supply and Demand, Moving Averages, blah blah. Again I'm not a professional, I'm a software engineer, not a professional trader, but rather than fallaciously attack me because of that, attack my argument and math, I'll welcome it

Theoretically there is no edge just because we "choose" to want a higher R:R, so to not get detracted and to answer OP, 1:1 is only frowned upon because of semantics... meaning it sounds like something we shouldn't AIM for, we should AIM for higher profits proportionally to losses, but like I said that's only half the equation.

You can only achieve success with a higher profit proportionally to losses, if over a statistically significant dataset your win rate on AVERAGE allows you to achieve >1 wins for every Reward+Risk amount you're aiming for. To put that simply,

"If I aim for 1:20 R:R, then for every 21 trades, I must win on AVERAGE more than 1 time". Because of the nature of average, If you win 1.3 times every 21 trades, you are mathematically profitable.

Also because of the uneven distribution of wins and losses, just because you're on a winning streak doesn't mean your win rate is "up", which is the fallacy found when examining a small dataset. Over 20 trades you might win 60% of the time, but extend that over 3000 trades, and you might just find that was just an unevenly distributed amount of wins.

So why do people choose to trade Renko, S/D, Moving Averages, other Indis, Price Action? It's because the trader believes that trading opportunity allows them in the context of their strategy to achieve > 1 wins per amount of Risk + Reward they are risking. They'll vehemently argue this and that, but they're all just arguing that theres a % edge that exists in that trading opportunity that doesn't exist from closing your eyes and placing a random trade.
  • #54
  • Feb 7, 2021 4:05am Feb 7, 2021 4:05am
Quoting Brandon65
I don't think any of us can escape math, no matter if we trade using Supply and Demand, Moving Averages, blah blah. Again I'm not a professional, I'm a software engineer, not a professional trader, but rather than fallaciously attack me because of that, attack my argument and math, I'll welcome it Theoretically there is no edge just because we "choose" to want a higher R:R, so to not get detracted and to answer OP, 1:1 is only frowned upon because of semantics... meaning it sounds like something we shouldn't AIM for, we should AIM for higher...
To add on, throw in subjective decision making for different RR for each trade the math gets a little less simple than to say 1:1RR or 1:3RR with such and such win rate when there's still no statistical significant sample size to draw any useful conclusion. As we well know sample size determines the confidence interval calculation too.
Know what you trade
  • #55
  • Feb 7, 2021 4:08am Feb 7, 2021 4:08am
Quoting BWilliam
{quote} To add on, throw in subjective decision making for different RR for each trade the math gets a little less simple than to say 1:1RR or 1:3RR with such and such win rate when there's still no statistical significant sample size to draw any useful conclusion. As we well know sample size determines the confidence interval calculation too.
Yep I agree, and it's almost impossible to quantify this subjective ruling that many traders make, hence why one always hears the term "The edge is inside the trader"
  • #56
  • Feb 7, 2021 1:02pm Feb 7, 2021 1:02pm
If you need 30 pips to hit TP/SL but the market is bouncing between a 20 pip range all day you could have made a hell of a lot more than a 1 trade 1:1 by working price action. But I do trade full time spending many hours on screen taking what the market gives me. I guess If I was only trading on weekly charts setting rigid 1:1 would make sense but I would assume you'd never make the money someone actively working price action effectively.
  • #57
  • Feb 7, 2021 2:45pm Feb 7, 2021 2:45pm
Quoting Brandon65
... They'll vehemently argue this and that, but they're all just arguing that theres a % edge that exists in that trading opportunity that doesn't exist from closing your eyes and placing a random trade.
This is the crux of why traders continue to lose. They believe there is some inherent mathematical "edge" if they just find the right combination of math formulas to run concurrently that takes away the truly random nature of trading. Enter R:R there by (supposedly) improving or maximizing what mathematical edge one thinks exists.

R:R, Hit rate (accuracy), Cash ratio...all of these measurements are only useful in evaluating YOUR performance...not that of the market nor your set of mathematical variable. The market simply doesn't work that way. Your "edge" is YOU...Period! If you can learn to "see" and evaluate the order flow/volume that enters and exits the market on a constant basis, you can use this in your decision making and (as I showed above) evaluate and quantify your performance in terms of profitability. That is what is is for. If I say I made $xx one month...that means nothing. If I said I made $xx and traded x times and each trade gained an average of $x and that for every dollar I lose I make x back...THIS tells you something about how I trade. Not my system, not my methodology, it simple tells you whether or not I am profitable, and the expectation one might have as to whether that profitability was sustainable or not.

Again, as part of a "system" of probability R:R and accuracy are meaningless, because using math to trade with is meaningless and will always end in a catastrophic failure. This is because math cannot account for every variable of every trader, that participates or doesn't participate...it simply is NOT possible. Therefore use these metrics to measure YOURSELF...not the market. You can wish to trade a 1:500 R:R but if the market doesn't agree it just wont happen, no matter what probability your math says it should.

Based on how YOU trade (enter/hold/exit), what do these metrics say about your results...THAT is when R:R/accuracy/expectancy...etc, matters.
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  • #58
  • Mar 4, 2021 5:42am Mar 4, 2021 5:42am
not exactly the law of large numbers, but setting a RRR of 1:2, with a fixed 25 pip Stop Loss and a 50 pips Take Profit, can lead to some serious gains on an account.
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the chart for 125 trades RRR1:2 25pip SL 1000 starting balance
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I only achieved just above 50% win rate but that is good enough for me. Will look to keep improving the win rate
  • #59
  • Mar 4, 2021 6:00pm Mar 4, 2021 6:00pm
Some of the grasp of basic arithmetic on display in this forum is really something special!


Quoting BWilliam
{quote} With no edge, the probability of success for 1:1 RR is 50%, for 1:2RR is 25%.

Strangely, when I went to school, for 1:2 it was 33.3%.

That was a long time ago, though. Must be showing my age, I guess.


Quoting Winston Reed
I decided on 3:1 because a with a win rate of a mere 33% I can be profitable.

Must be the "new math" they teach nowadays.

In my day, at 3/1 any win-rate above 25% was profitable.

Seriously, how do people hope to trade successfully if they can't understand arithmetic on the level my 7-year-old granddaughter has to do for school homework?
  • #60
  • Mar 4, 2021 6:08pm Mar 4, 2021 6:08pm
Quoting KarlKraus
Some of the grasp of basic arithmetic on display in this forum is really something special! {quote} Strangely, when I went to school, for 1:2 it was 33.3%. That was a long time ago, though. Must be showing my age, I guess. {quote} Must be the "new math" they teach nowadays. In my day, at 3/1 any win-rate above 25% was profitable. Seriously, how do people hope to trade successfully if they can't understand arithmetic on the level my 7-year-old granddaughter has to do for school homework?
I stand corrected, I made a simple arithmetic mistake. Thank you for pointing it out.
Know what you trade
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