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A member recently submitted the following:
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There are two parts to the reward-to-risk ratio, "reward" and "risk".
Risk is easier. At the time of the trade, it is usually possible to
determine the risk. This is related to how far away your exit stop is
on the bar of entry. Obviously, the stop moves as time elapses but
since losing trades usually exit soon after an entry, the stop will
not have moved a lot by the exit.
Reward is harder. You need to evaluate this on the bar of entry and
there is not a lot to go on in most cases. I usually assume all
trades have the same potential reward....
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Just a quick comment from one who has been trading futures full-time for
most of 30+ years, including 7 using my own computerized systems: (The 1st
10 years were up / down, but most of the last 20 years have been
profitable.)
The key to risk / reward is not the stop point or profit objective, but how
likely either is to occur. This is a key conception difference. It changes
the way one approaches the markets, and particularly systems. It means one
must start with an understanding of the markets, develop an hypotheses about
a particular methodology by further observing the market, and only then
quantify and finally test the particular system.
An earlier contribution mentioned how a system tested profitable on
something like 98 straight tests, but fell apart in real-world application.
An understanding of the market would immediately reject any system that
tested so profitable.
I estimate my personal discretionary trading averages about 30 - 40 %
profitable trades. Not surprising, most of the systems I developed yielded
about the same. Both my systems and personal trading generally yield in
the 20 - 150 % return per year. (The large difference is more the result
of the market conditions, rather than anything different I /systems may do.)
All the top-notch traders I've met over the years have numbers not that
different from the above. The most difficult part of trading is living
with being wrong more than twice as often as you are going to be correct.
Any system, or trader, which claims more than 40% profitable trades, for any
extended time, I generally reject as either being untrue, random, or lucky
(such as data-fitting a system.) There are exceptions, particularly for
certain successful intra-day trading, where your % of profitable trades
might be a bit higher.
In the physical sciences if your hypothesis is correct you expect an
experiment's results to be duplicated precisely. In the social sciences,
including human psychology, economics, social behavior, the markets, such
precision is epistemologically not possible. Spending more time on the
conceptual aspects of the market will yield far more profits than applying
physical science tools to trading systems.
Years ago I owned a small commodity firm where we offered no advise, just
discount commissions. While something like 90% of commodity traders lose
money, it was always interesting to notice how many engineers, doctors, &
other people from the physical science world thought it would be so simple
to quantify & thus predict market action. On the other hand, one of the
best full-time traders I ever knew previously taught abnormal psychology at
a major college.
Hope the above may prove fruitful for some.
Regards,
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