How to figure risk to reward (a formula)

[clayton4115]

if you dont believe i am a FP, just go to the asic website, my name is there as a FP.

www.asic.gov.au


i wont give you my surname here if you PM i will give you my surname and you can see my name there.

 

[nomore4s]

if you dont believe i am a FP, just go to the asic website, my name is there as a FP.

www.asic.gov.au


i wont give you my surname here if you PM i will give you my surname and you can see my name there.

Oh I believe you're a FP alright, probably would have got a job at Storm no worries.

 

[Mr J]

Hey, don't generalise us younger ones! Most of us on here use risk management. I've learnt lots more than 'cos of you guys. I think Clayton may need to read a book about it.

This forum recommended Adaptive Analysis by Nick Radge, and that changed my perspective on everything.

I'm not generalising at all as the attitude is typical of someone inexperienced and immature, in trading and in life. You may practise sensible risk management and be very gounded, but most people at this age are not. They have no concept of risk or grinding their way to success. They let early success go to their head, get cocky and think risk is irrelevant for them. I know because I've been there, and have seen many others there. It's an attitude that is usually only lost - if ever - with time and experience, often only from having rough stretches. There was no better example of this than online poker in '04 and '05.

This certainly isn't restricted to just 18-21 year olds; many people diplay this kind of behaviour. However, like any form of immaturity, it's more commonly found in those who are less experienced. If you need an example of adults who haven't outgrown this, check out elitetrader :.

if you dont believe i am a FP, just go to the asic website, my name is there as a FP.

www.asic.gov.au


i wont give you my surname here if you PM i will give you my surname and you can see my name there.

I believe you, it doesn't make much difference. The fact is that you are not only disregarding risk, you're disregarding all of the advice in this thread. It's usually best to at least consider advice, even if you don't agree with it. While I often come across as if I'm pretending to know it all, I'm always considering other people's opinions as long as they're reasonable. Nobody knows it all, which is why we need to listen to others. They're often as wrong as we are, but there is still usually something to be learned. Just consider the advice of those who have posted in this thread.

 

[imiyakawa]

Okay I've only read the first few posts, but aren't you missing a variable?

Dont you need an estimated probablilty of
a) you hitting your stop.
b) you achieving your objective.
if your Expected value (mathematical expectation over infinite runs) or a usable risk:reward ratio is to be calculated?

And to do this without arriving at stupid conclusions you'de have to be pretty experienced.

E.G. In the given example (in post #1), your risk:reward would only REALLY be 1:4 if you hit your stop ($4) as many times as you reach your objective ($9).

A more realistic risk:reward would be less than 1:4 imo, at least for traders like me who aren't experienced. For some, it might even be higher than this figure.

 

[beamstas]

Okay I've only read the first few posts, but aren't you missing a variable?

Dont you need an estimated probablilty of
a) you hitting your stop.
b) you achieving your objective.
if your Expected value (mathematical expectation over infinite runs) or a usable risk:reward ratio is to be calculated?

And to do this without arriving at stupid conclusions you'de have to be pretty experienced.

E.G. In the given example (in post #1), your risk:reward would only REALLY be 1:4 if you hit your stop ($4) as many times as you reach your objective ($9).

A more realistic risk:reward would be less than 1:4 imo, at least for traders like me who aren't experienced. For some, it might even be higher than this figure.

The risk is a percentage of your account
Reward is what you gain on the trade. Risk reward can't be calculated before a trade, only after (unless you use a profit target)

Risk is the entry price less your stop

so entry $5
stop loss $4
Risk = $1

You sell for $7 after a few weeks
Reward = $2

R:R = 2:1

 

[Mr J]

Agree with Beamstas, R:R represents the value of a losing trade compared to the value of a profitable trade. R:R means nothing by itself, we also have to know the probability of success.

A more realistic risk:reward would be less than 1:4 imo, at least for traders like me who aren't experienced. For some, it might even be higher than this figure.

I think it's a good exercise for entries. A tighter-than-usual stop forces more precise entries and improves our efficiency. It seems to be very worthwhile for me.

 

[nulla nulla]

The following link is an excellent article on determining risk reward by Darryl Morley:

http://thedaytrader.com.au/27 August.html

Every intending day trader should read this article in determining a "Risk Assessment Policy" for trading.

 

[Sean K]

ok these are my shorts for this week, i havent put these as live trades as this week i will be away from my computer alot and wont be able to monitor it

so just for kicks lets see how i go come friday 4pm

current prices and ASX code below

ASX 35.61
WOW 26.20
HSP 4.00

im bearish on the above for the next few days.

The great thing about ASF is that people tend to share their analysis.

The fundamentals and/or the technicals.

We're very happy to have negative opinions on stocks, if they are supported by some attempted TA and/or FA. Just attempted, at least.

Very happy for people to post their trades. If they provide some logic.

If you can't do that, then stick to providing this sort of advice to your paying clients.

Thank you,
kennas

 

[beamstas]

The great thing about ASF is that people tend to share their analysis.

The fundamentals and/or the technicals.

We're very happy to have negative opinions on stocks, if they are supported by some attempted TA and/or FA. Just attempted, at least.

Very happy for people to post their trades. If they provide some logic.

If you can't do that, then stick to providing this sort of advice to your paying clients.

Thank you,
kennas

Exactly
We ain't 60 year old grandmas who don't know better than to listen to advice from a loose cannon FP

 

[tech/a]

OH YEH!!!

Speak for yourself Sonny!!

 

[Sean K]

OH YEH!!!

Speak for yourself Sonny!!

Now, Techy, I really think you should buy some managed funds at your age. Something more stable, providing a regular income.....

 

[nulla nulla]

Now, Techy, I really think you should buy some managed funds at your age. Something more stable, providing a regular income.....

Go for a quarterly dividend, it will seem like your getting more return on your investment in the time you have left.

 

[Temjin]

Go for a quarterly dividend, it will seem like your getting more return on your investment in the time you have left.

ok, that's a bit cruel especially on the last part.

clayton4115, trust us and go read Adaptive Analysis or Trade Your Way to Financial Freedom. You will have a whole new perspective on risk management. I was so close to become a FP and I certainly understood the concept of "risk/reward" from your discipline. (standard deviation!) It's totally outdated and impractical.