Tag Archives: probability

‘Issues’ with risk vs. reward

I’m about to argue for the slaying of a sacred cow… In an awful lot of trading literature you see the following. If you have a system that delivers a certain amount of ‘x’ reward for every ‘y’ risked then you only need to get a low(ish) percentage of trading decisions right and you will be profitable over time.

Frankly this sounds like a crappy basis on which to build a business.

What people do all the time is confuse and interchange the probability of success of a particular trading idea with a high reward vs. risk ratio.

THEY ARE NOT THE SAME THING

What is far more important to me is having a clear understanding whether a particular trade idea has a high probability of success in a given set of market conditions…

If your trade entry is crap then it doesn’t matter one hoot what your ‘risk/reward’ is it’ll never bloody get there. You’ll either lose straight off the bat or will never reach the target you need to justify the crappy position you took in the first place.

Now here’s where this applies to me, before I get into a flame war with anyone ;)

The only way to realise whether you’re entering a trade for good reasons is if you compare your reasons with what happened and your exit later. This isn’t possible unless you record all your trades. Have I been doing this? What do you think? Hell no.

But I will be from now on. Every single one. Without fail.

Only then will I have a clue whether taking a trade for ‘x’ reasons under ‘y’ conditions is likely to work. This is the percentage/probability I’m interested in.

The reward/risk can take care of itself :)