Subscribe/RSSJordan posted a comment to the Win/Loss Ratios, Risk and More blog piece. I began to make a brief comment to Jordan’s comment which turned out not to be not so brief. So, I thought I would post it as a blog piece instead.
Firstly, I appreciate everyone who comments on the blog commentaries. Especially those who use there actual names and include a picture! Thanks Jordan.
Don’t confuse win/loss ratios with reward/risk ratios. There is a section in High Probability Trading Strategies that clearly shows how bogus pre-trade reward/risk ratios are. There is no objective method to determine the potential reward for a potential trade. So there is no objective way to determine a “risk/reward” (reward/risk) ratio before a trade is made. The risk portion (better called capital exposure) is defined by the difference between entry price and initial protective stop price. It is known in advance. But, the “reward” portion is nothing but a best guess. All risk/reward strategies are bogus.
The win/loss ratio and average win/average loss ratio are historical figures based on completed trades. 1/2 win/loss is typical of a consistently successful trader (about 33% wins). Better than 1/1 (more than 50% winners) and you’re in league with the pros for sure. As long as the average win is much greater than the average loss. Net profits are a result of both factors, win/loss and ave win/ave loss.
If the average loss is much greater than the average win, you better have a big win/loss ratio with most of the trades winners. Since it is very unusual for even an experienced, consistently successful trader to have greater than a 1/1 win/loss ratio over time, the ave win verses ave loss should usually be high. Every trader should periodically do win/loss and ave win/ave loss analysis of completed trades. If those ratios are not acceptable and resulting in net gains over time, the first thing to consider is – ARE YOU FOLLOWING THE MOST IMPORTANT AND BASIC TRADE MANAGEMENT STRATEGY TO ONLY ACCPET TRADES WITH 3% OR LESS INITIAL CAPITAL EXPOSURE. The book talks a lot about this including individual trade exposure and total outstanding capital exposure.
If you limit the capital exposure and only take trades with a high probability outcome as described in the book, your win/loss and ave win/ave loss ratios should be acceptable and net gains will result.
Thanks Bob for this timely reminder
Dear Bob
Thank you for your most recent 23 July tutorial.
A question: why do traders sometimes do charts of the cash markets and sometimes use the futures markets?
Cash charts are often used for longer term data to avoid the problem of either a jump prices or having to normalize prices at contract roll overs for continuous futures charts.
OK Bob
This explains why they use charts of the cash markets but why do they use the futures markets?
S&P: has been an interesting month; loking forward to your next tutorial
Bob,
The last video you posted the “expectation” was that we were approaching a high, if I remember correctly. Everything seemed to be in place for a correction, but the rally continued. Would you do at least a quick update as to whether or not a short trade was triggered and if so how would it of been managed until stopped out? I’m in observation mode at this point in time and not trading. Thanks
David
Hi Bob,
I loved the book, just finished it a few weeks ago. It has given me great advice on timing, patterns, and entry/exit strategies. I have just applied the knowledge to the US Dollar index and believe it has hit a significant bottom this week…I’ll let you know how the trade works out.
I have a question which I don’t remember seeing in the book: Do you ever have a situation that you would add to a position after the initial entry?
Thanks,
Jason
Great book – just finished it.
I try to do a reward/risk analysis to get proper position sizing…if I assume a 2:1 reward/risk, and use 2% risk for my trading exposure, I can at least compare different scenerios for reasonable outcomes (this gets 10%, which would be more reasonable than say 40%) .. it at least keeps me away from volotile stocks..
I agree – you don’t know the outcome – but you can know your exit strategy.
Bill Clark
Windham, VT