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Moving on from 1:1 Risk-Reward

  • #1
  • Quote
  • First Post: Aug 17, 2023 1:21pm Aug 17, 2023 1:21pm
It is a matter of math. The higher your reward with respect to your risk; the less winrate you need.

This was the hardest for me to change in how I traded; where i had to let myself lose a couple of times and bring in the bagger, the winning trade.

The elements of course is your have a system where you stick to the first 100% as capital as basis. And you must in this sense be able to trade atleast 20 to 25 x over the course of the month.

If you're like me who make money outside of trading and use trading as card counting like in the casinos; then you'll be satisfied if you win and get off the table when you do.

So the idea is risk to reward should atleast be 1 is to 3. Where you allow yourself 6 wins every 15 trades to be profitable or 40% winrate.

For me the idea is simply doing the reversals and the fibonacci. But if you're not into fibs, you can use your own entry and exit model.

Summary

1. Risk is atleast 1/3rd of the reward or reward is x3 the risk.
2. Risk is at most 5% of the 100% capital. And you then don't adjust the 100% until 20 to 25 trades or 1 month has passed.
3. Use fibonacci retracement tool for consistency in your entries. Else, levels or candle patterns is viable.
4. Have a trusted 40% winrate system that you have faith in.
Trading is gambling. So gamble responsibly.
  • #2
  • Quote
  • Aug 17, 2023 4:25pm Aug 17, 2023 4:25pm
Hello Sovy.
All that risk reward thing is pretty tricky.
Quoting Sovy
The higher your reward with respect to your risk; the less winrate you need.
Yes, but the higher your reward with respect to your risk, the lower your winrate will be. If your entry is based on the same strategy, your winrate with a 1:1 reward will be much higher than with a 1:3.
Quoting Sovy
So the idea is risk to reward should atleast be 1 is to 3.
I don't think you can have a strict number for your reward. Maybe 1 to 2.75 will produce more profit, or 1 to 3.15? In my opinion, the only rule you can apply here is that, in the long term, your reward should be higher than your risk. If you have an edge in the market, your rr should be >1 and your winrate should be above 50%, now you are making money. If it is not, then your analysis is wrong.
  • #3
  • Quote
  • Aug 17, 2023 5:49pm Aug 17, 2023 5:49pm
Quoting Sovy
So the idea is risk to reward should atleast be 1 is to 3. Where you allow yourself 6 wins every 15 trades to be profitable or 40% winrate.
Nope. This is dead wrong. Which isn't surprising as it is what every retail trader and their dog aims for...including myself, as old habits die hard.

The studies have been done. The most profitable strategies, are those with low win rate, and huge RR. After that, it is actually high win rate, and low inverse RR strategies. The two things that conventional wisdom teaches traders not to do, are actually precisely the thing to do.
  • #4
  • Quote
  • Aug 17, 2023 6:41pm Aug 17, 2023 6:41pm
Quoting BlaBlaFx
Hello Sovy. All that risk reward thing is pretty tricky. {quote} Yes, but the higher your reward with respect to your risk, the lower your winrate will be. If your entry is based on the same strategy, your winrate with a 1:1 reward will be much higher than with a 1:3. {quote} I don't think you can have a strict number for your reward. Maybe 1 to 2.75 will produce more profit, or 1 to 3.15? In my opinion, the only rule you can apply here is that, in the long term, your reward should be higher than your risk. If you have an edge in the market, your...
Your opinion is noted.
Trading is gambling. So gamble responsibly.
  • #5
  • Quote
  • Aug 18, 2023 7:13am Aug 18, 2023 7:13am
Quoting GusParker
{quote} Nope. This is dead wrong. Which isn't surprising as it is what every retail trader and their dog aims for...including myself, as old habits die hard. The studies have been done. The most profitable strategies, are those with low win rate, and huge RR. After that, it is actually high win rate, and low inverse RR strategies. The two things that conventional wisdom teaches traders not to do, are actually precisely the thing to do.
my point exactly. Low win rate and high rr.
Trading is gambling. So gamble responsibly.
  • #6
  • Quote
  • Aug 18, 2023 7:31pm Aug 18, 2023 7:31pm
Quoting Sovy
{quote} my point exactly. Low win rate and high rr.
No.

You said 3:1.

Every retail trader and his dog aims for that.

As per the study, a 'high win rate', is when a trader is looking to get into a position on some asset and let it run and run into a huge win. Hardly any retail trader does that, as we couldn't bear the sheer volume of times that we would be in good money in a trade, only for it to come back and stop us out at scratch, or even turn into a loser.
  • #7
  • Quote
  • Aug 18, 2023 11:52pm Aug 18, 2023 11:52pm
Quoting GusParker
{quote} ... a 'high win rate', is when a trader is looking to get into a position on some asset and let it run and run into a huge win..
A high win rate is when you have much more winning trades than losing trades.
  • #8
  • Quote
  • Aug 19, 2023 2:58am Aug 19, 2023 2:58am
Quoting GusParker
{quote} No. You said 3:1. Every retail trader and his dog aims for that. As per the study, a 'high win rate', is when a trader is looking to get into a position on some asset and let it run and run into a huge win. Hardly any retail trader does that, as we couldn't bear the sheer volume of times that we would be in good money in a trade, only for it to come back and stop us out at scratch, or even turn into a loser.
Reward is 3x the risk. Or requires a system that is 40% winrate to be profitable.

Quoting Sovy
It is a matter of math. The higher your reward with respect to your risk; the less winrate you need. This was the hardest for me to change in how I traded; where i had to let myself lose a couple of times and bring in the bagger, the winning trade. The elements of course is your have a system where you stick to the first 100% as capital as basis. And you must in this sense be able to trade atleast 20 to 25 x over the course of the month. If you're like me who make money outside of trading and use trading as card counting like in the casinos;...
It's literally the first paragraph

Quoting BlaBlaFx
{quote} A high win rate is when you have much more winning trades than losing trades.
Yes.
Trading is gambling. So gamble responsibly.
  • #9
  • Quote
  • Edited 3:55am Aug 19, 2023 3:38am | Edited 3:55am
Quoting Sovy
{quote} Reward is 3x the risk. Or requires a system that is 40% winrate to be profitable. {quote} It's literally the first paragraph {quote} Yes.
Yes....and u seemed to be calling that a high rr trade (me calling it a high win rate was an obvs typo).

But it isn't.

2:1, 3:1, is what the overwhelming majority of retail traders aim for.....and all I was trying to tell you, is that the most profitable traders, are either holding out for HUGE win ratios, i.1. 20:1 rr....or are scalping 0.5RR (or less) trades, and thus can justify taking trades all the time.

This week, I spotted an intraday trade in GBPUSD on the back of a bit of news. Such an obvious trade, it was like some just leaving a bag of money in the corner waiting on someone to pick it up. I located the probable Target, but it turned out it was just like 1.1 rr or something like that. My retail trained mindset couldn't accept that, as "as a trader must be getting at least 2:1 on every trade, this way he can be wrong 50% of the time and still make money, blah blah blah....". So I adjusted the TP to a happy compromise 1.5:1 rr. I went out for a bit. By the time I got back the probable Target (at ~1.1:rr) had been tagged, and after the small liquidity pool (which consisted of my probable Target) had been rinsed, the market had no further motivation to go to the upside, thus the next ripest liquidity was to the downside, where my SL was, which absolutely would have gotten tagged, had I not broken another retail trained mindset rule of training "always honour your original Stop Loss", and exited the trade at a small loss.

Whilst traders like to talk about this strategy with this strike rate, and that strategy with that rr ratio, the truth is, every trade is different and in reality a trader has no fkn idea of the strike rate and/or rr probabilities of any given trade. There are times where a trader absolutely should take a mere 1:1 rr, and times where he should balk at a 3:1rr. Providing a stop loss is well placed, in an area where the market should NOT want to go unless ur analysis is wrong, clean runs to a tune of 3:1 rr are pretty rare. For every 3:1 trade, there will generally be 4-5 1:1 opportunities within the same move, and using the same SL.
  • #10
  • Quote
  • Edited 8:52am Aug 19, 2023 8:15am | Edited 8:52am
Quoting GusParker
{quote} Yes....and u seemed to be calling that a high rr trade (me calling it a high win rate was an obvs typo). But it isn't. 2:1, 3:1, is what the overwhelming majority of retail traders aim for.....and all I was trying to tell you, is that the most profitable traders, are either holding out for HUGE win ratios, i.1. 20:1 rr....or are scalping 0.5RR (or less) trades, and thus can justify taking trades all the time. This week, I spotted an intraday trade in GBPUSD on the back of a bit of news. Such an obvious trade, it was like some just leaving...
1. 1 to 1 vs 1 risk 3 reward, the 3 reward has higher rewards
2. The above 1 risk 3 reward course needs less winrate than a 1 to 1 to make money which is my point to begin with.
3. Subjectivity. If you are profitable with your method then that's fine. As i became more profitable in reward 3 x the risk than reward 1 x the risk over all.


I found this and it's a better computation in general.
Attached Image (click to enlarge)
Click to Enlarge Name: F2ilQRRXwAIe6Ph.jpg Size: 11 KB
Trading is gambling. So gamble responsibly.
  • #11
  • Quote
  • Aug 20, 2023 3:19pm Aug 20, 2023 3:19pm
Inserted Video


Weekly to daily.

Entry can be daily or 3h.
Trading is gambling. So gamble responsibly.
  • #12
  • Quote
  • Oct 3, 2023 12:31am Oct 3, 2023 12:31am
First of all, it is not advisable to trade at all with a 1:1 risk-reward ratio. Just because of simple maths, let me give you an example. If your trade success rate is 50% your profit will be zero. In fact, you might be in minus because you will pay the commissions to the trades as well from your profits.
In trading, it is possible to make decent profits with a 50% success rate. However, you need to adjust your risk-reward ratio to be at least 1:1.5 or more. I prefer 1:3, this gives you an opportunity to gain profit with a success rate of only 33%.
  • #13
  • Quote
  • Oct 3, 2023 12:59am Oct 3, 2023 12:59am
Quoting Guran
First of all, it is not advisable to trade at all with a 1:1 risk-reward ratio. Just because of simple maths, let me give you an example. If your trade success rate is 50% your profit will be zero. In fact, you might be in minus because you will pay the commissions to the trades as well from your profits. In trading, it is possible to make decent profits with a 50% success rate. However, you need to adjust your risk-reward ratio to be at least 1:1.5 or more. I prefer 1:3, this gives you an opportunity to gain profit with a success rate of only 33%....
Yes, that is the way, especially if you have enough capital to let that happen.
Trading is gambling. So gamble responsibly.
  • #14
  • Quote
  • Oct 3, 2023 2:34pm Oct 3, 2023 2:34pm
Quoting Sovy
It is a matter of math. The higher your reward with respect to your risk; the less winrate you need. This was the hardest for me to change in how I traded; where i had to let myself lose a couple of times and bring in the bagger, the winning trade. The elements of course is your have a system where you stick to the first 100% as capital as basis. And you must in this sense be able to trade atleast 20 to 25 x over the course of the month. If you're like me who make money outside of trading and use trading as card counting like in the casinos; then...
For this techniques to work you have to know true probability distribution of the process that generates market prices. In this case you can indeed apply bet management techniques that maximize or minimize some characteristics of your aggregate returns. See Kelly criterion for example
  • #15
  • Quote
  • Oct 11, 2023 8:29pm Oct 11, 2023 8:29pm
I think even 1:2 would be a very good ratio, since it often has better w/r than 1:3(better psychology), but at the same time it's actually very good to manage, maths wise.
  • #16
  • Quote
  • Oct 12, 2023 6:25pm Oct 12, 2023 6:25pm
Quoting Sovy
{quote} 1. 1 to 1 vs 1 risk 3 reward, the 3 reward has higher rewards 2. The above 1 risk 3 reward course needs less winrate than a 1 to 1 to make money which is my point to begin with. 3. Subjectivity. If you are profitable with your method then that's fine. As i became more profitable in reward 3 x the risk than reward 1 x the risk over all. I found this and it's a better computation in general. {image}

And what should be the optimal bet size for each risk reward ratio? Should we also change it or it should stay the same.

Also I noticed that breakeven win rate from your picture can be calculated as 100 / (1 + R) + 1, where R is reward value in the ratio. Looks too simple stuff to change winnings odds if applied.
  • #17
  • Quote
  • Oct 12, 2023 7:18pm Oct 12, 2023 7:18pm
Quoting pizd0s
{quote} And what should be the optimal bet size for each risk reward ratio? Should we also change it or it should stay the same. Also I noticed that breakeven win rate from your picture can be calculated as 100 / (1 + R) + 1, where R is reward value in the ratio. Looks too simple stuff to change winnings odds if applied.
I personally use the range of the opening of each session as the 1 risk and if reward it means 2 x that or 3. It's not an easy path to commit to a 1 to 3, but i find it really good.
Trading is gambling. So gamble responsibly.
  • #18
  • Quote
  • Oct 17, 2023 2:17am Oct 17, 2023 2:17am
Quoting GusParker
{quote} Nope. This is dead wrong. Which isn't surprising as it is what every retail trader and their dog aims for...including myself, as old habits die hard. The studies have been done. The most profitable strategies, are those with low win rate, and huge RR. After that, it is actually high win rate, and low inverse RR strategies. The two things that conventional wisdom teaches traders not to do, are actually precisely the thing to do.
The most profitable strategy is one that someone can execute extremely well (with the backtesting to support it).

At least in regards to low w/r high RR strategies, plenty of people cannot handle it. They'll be way more profitable on something more moderate.
  • #19
  • Quote
  • Oct 17, 2023 6:04am Oct 17, 2023 6:04am
Quoting Guran
First of all, it is not advisable to trade at all with a 1:1 risk-reward ratio. Just because of simple maths, let me give you an example. If your trade success rate is 50% your profit will be zero. In fact, you might be in minus because you will pay the commissions to the trades as well from your profits. In trading, it is possible to make decent profits with a 50% success rate. However, you need to adjust your risk-reward ratio to be at least 1:1.5 or more. I prefer 1:3, this gives you an opportunity to gain profit with a success rate of only 33%....
This 'simple maths' assumes that you have just as much chance of 'being right' on a 1:1 trade, as you do on a 2:1 or 3:1. But as any trader could tell you, this simply isn't the case. The market HATES 2:1 trades. If your trade goes comfortably to 2:1, chances are it is going to go a lot further.

Anyhow, the research is already in.

Most profitable strategies are trades looking for HUGE RR and tolerating a low hit rate.....this is a very hard thing for a trader to have the discipline to do.
2nd most profitable strategies are trades looking for sub 1:1 RR (sorry, but it's true).....this is also a hard thing for a trader to do, as it is exactly the thing that a trader's mind has been taught not to do.

Then somewhere in between, are the retail traders, getting chopped up and fk'd over by the market as they ply their 2:1 and 3:1 trades, with their infamous 90% net loser record. Whatever the common wisdom is, is whatever everyone else is doing, and whatever everyone else is doing, is likely something that you shouldn't be doing.
  • #20
  • Quote
  • Oct 17, 2023 8:13pm Oct 17, 2023 8:13pm
Quoting Guran
First of all, it is not advisable to trade at all with a 1:1 risk-reward ratio. Just because of simple maths, let me give you an example. If your trade success rate is 50% your profit will be zero. In fact, you might be in minus because you will pay the commissions to the trades as well from your profits. In trading, it is possible to make decent profits with a 50% success rate. However, you need to adjust your risk-reward ratio to be at least 1:1.5 or more. I prefer 1:3, this gives you an opportunity to gain profit with a success rate of only 33%....
If you have a 33% win rate on 1:3 Risk:Reward trades, you'll be highly profitable. A 1:3 (16.67%) is 3x harder to hit than a 1:1 (50%), giving it 16.6% chance of winning, or 83.3% chance of losing. Basic distribution of losses will have you losing not only more, but longer streaks of losing without a winner while taking much less trades.

Just looking at the top 100 live accounts on FF in 2023, with large sample sets, the range of Risk:Reward ratios range from 1:0.1 (93% winners) to 1:1.33 (43% winners). I've yet to see an account survive a 1:3 with its high loss rate and lower trade count.

Imo, with the accounts I've seen, win % should be more than 50% and the R-MULTIPLE should be no more than 1 (1:1).
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