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What is the brethren's attitude to risk/reward ratios? Conventional wisdom dictates that the reward should be higher than the risk. However, I heard opinions to the contrary, some coming from reputable traders (who seem to me as such). So, instead of RR o1:3-5 they go the other way, risk 2 for the reward of 1.
What do you think about it? What do you guys use as RR?
It's a metric that measures your results. It changes with every trade, depending on how you managed the trade.
I swing/position trade equities. There is no R/R in my plan. I let winners run and cut losers quickly. The R/R ratio changes every time I close a position.
"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
The way I see things for my trading is that I should have a risk:reward ratio of at least of 1:2. I like to think I can predict the direction of the market but at the end of the day I realize the market will do what it does and my predictions are usually wrong. Therefore having a reward at least double my risk usually keeps me in the green. In addition if I see the market is really moving I will go for 1:5 or greater ratio.
I have a predetermine stop loss to protect my capital.
My exits are determined by the price action. Mainly based on trend following. I get out when the stock stops trending.
Why close a position that is moving in your direction?
How do you determine a profit target?
"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
Trading: Equities, index options and futures options
Posts: 192 since Apr 2010
Thanks Given: 67
Thanks Received: 203
Risk and reward are not enough to evaluate an edge. You also need the probability. A high Reward to Risk ratio may be invalidated by a very low probability and a low ratio may be profitable if the probability is high enough.
I think exits depend on the behavior of the asset. It it is trending it makes sense to milk it as long as the trend lasts. Even then, you can take one of the two approaches. One - let the trade run. Two - catching small swings while increasing size according to your position sizing technique. For the sake of stating the obvious, staying in the trend will not work if the asset is not trending, and that's where profit targets are crucial.
Generally, I scale out of positions, 20% at a time, every 30 - 40 pips, leave the remaining 20% to run or breakeven.
