How to figure risk to reward (a formula) - Aussie Stock Forums

# Thread: How to figure risk to reward (a formula)

1. ## How to figure risk to reward (a formula)

HOW TO FIGURE RISK TO REWARD ON A PARTICULAR TRADE .

HOPE THIS ONE HELPS IN UNDERSTANDING .............

2. ## Re: How to figure risk to reward ( a forumula )

Thanks for that explanation Waves.

From a purely mathematical prospective:

Reward = Your Price Objective - entry price (+ve number)

Reward to Risk = 4 to 1

or

Risk to Reward Ratio = 1 to 4

3. ## Re: How to figure risk to reward ( a forumula )

Of course often "Your price objective" isnt known.

There are arguements on both sides of the fence re "Price objectives".
Personally my veiw is that setting a price objective and blindly following it maybe very costly.I have had many trades go well beyond an initial objective in fact some 300% plus.
On the other side 3 losses in a row would make the objective look a little light.
Particularly if it happens often without a good string of wins.

The only answer then is extensive testing which will then give an expected R/R and expectancy for the trading methodology you adopt.

Many who do this with price objective analysis are suprised at the result.

a 4:1 R/R doesnt guarentee profit or relieve you from possible failure over many trades.An objective is just that---often failing---often exceeding.

A positive reward to risk setup and implementation in isolation has little value.

4. ## Re: How to figure risk to reward (a formula)

TECH A NOTHING IS 100 % PERCENT
SO DON'T BE SO HARSH ON RISK TO REWARD TRADES , AND TRADING WITH AN OBJECTIVE IN MIND .......

What makes a market place is all of our diffrences of oppinions .
------- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

It is far more difficult to exit a trade than to enter a trade .... I am sure that you have heard that said before ,,,

THIS IS WHY ,

When making trade it just as important to have an idea where you want to exit as it is to place a stop to protect yourself from a move against you . ( THIS IS A PEARL OF WISDOM )

THERE IS NO HOLY GRAIL ///// I KNOW THAT YOU KNOW THIS ...

THATS WHY I TRADE ELLIOT WAVES becase its giving you a
probaility of where to look for a turn in a given market .....

The smaller the risk in relation to the price objective , the better chance of success in long haul .... It's just the way that is ...

Think of a Head and Shoulder pattern ... you learned of them long ago .... they always have a target based on the head and the neckline area ... This is not my design ... It was around long before all of us an will be around for some time after we are gone //

Please try to understand the price target in a head and shoulder set -up ... as an example , Because there are other patterns like symetrrical triangles and falling wedges and ascending triangles that also have price targets tied to them .... Traders have beeen measuring these price patterns for a long time ....

Surely ... they don't all make it to thier targets or so called objectives , and I totaly agree with you , that they don't ..

But , it is the best premise there is to work on... if you are doing any type of teaching or explaining of price patterns ... this is always explained and drawn out on charts ////

5. ## Re: How to figure risk to reward (a formula)

Here's a recent article on Risk to Reward ..

6. ## Re: XAO Analysis

well we passed it! 4000 points!

now 4300 is next resistance! see you there!

i am short a couple of stocks though, made a nice 23% return on MAP today and was up over 300% on CTX on my morning trade only to see it dwindle to a 5% ROE,

im trading CFDs so that why the huge returns (negative returns)

still holding short on CTX and MAP

MQG is looking like a short coming up in a few days.

7. ## Re: XAO Analysis

Originally Posted by clayton4115
i am short a couple of stocks though, made a nice 23% return on MAP today and was up over 300% on CTX on my morning trade only to see it dwindle to a 5% ROE,

im trading CFDs so that why the huge returns (negative returns)
Mate!!

return on margin is quoted by the soon to blow up.

Give us a return on risk. Just so we can have a laugh.

8. ## Re: XAO Analysis

yea i can do that

LOL CFD Balance \$4700

BUY CTX 5% margin 2000 units at \$13.30 total exposure \$26,600 my equity \$1330. Total at risk 1330/4700 = 28% of portfolio!

sell at \$13.36 for a \$65 profit after brokerage.

9. ## Re: XAO Analysis

entered SHORT MAP

Short 4000 units at \$2.36 1 cent move equals \$40 either way for me,
stock falls to \$2.30 exit the trade

\$944 of my equity, made \$220 profit after bkge

ROE 23.31% after brokerage.

10. ## Re: XAO Analysis

SHORT CTX

Units 168.00
Total Exposure \$1,995.84
Margin 5.00%
My Ety \$99.79
Exit Price \$12.80
Loss -\$166.56
ROE -\$166/\$99
= -167%

11. ## Re: XAO Analysis

Originally Posted by clayton4115

SHORT CTX

Units 168.00
Total Exposure \$1,995.84
Margin 5.00%
My Ety \$99.79
Exit Price \$12.80
Loss -\$166.56
ROE -\$166/\$99
= -167%
lol, you're kidding me. Is this a joke?

ROE is meaningless - except to make your figures sound good. In these trades you are risking more than your original equity (as proven in your last trade), you do know that don't you?

You made \$65 on a trade holding 2000 units but then lose \$165 on a trade holding 168 units. That doesn't sound warning bells?

12. ## Re: XAO Analysis

no its not a joke,

yes i know about money management and risking max 2 to 5% of your portfolio, however this \$5k make 6% of my total portfolio, i have other monies in commsec invested longer term,

so this is not my total position.

13. ## Re: XAO Analysis

Originally Posted by clayton4115
no its not a joke,

yes i know about money management and risking max 2 to 5% of your portfolio, however this \$5k make 6% of my total portfolio, i have other monies in commsec invested longer term,

so this is not my total position.

You're quoting ROE but you are risking more than your original equity in that trade so your ROE figure is useless.
Good trading is about risk vs return. The risk vs return on the trades you posted will eventually lead to blowing up your account. What happens if your 2000 shares had moved against you as much as the 168 units or even half as much?

14. ## Re: XAO Analysis

Originally Posted by nomore4s
lol, you're kidding me. Is this a joke?

ROE is meaningless - except to make your figures sound good. In these trades you are risking more than your original equity (as proven in your last trade), you do know that don't you?

You made \$65 on a trade holding 2000 units but then lose \$165 on a trade holding 168 units. That doesn't sound warning bells?

15. ## Re: XAO Analysis

Originally Posted by clayton4115
no its not a joke,

yes i know about money management and risking max 2 to 5% of your portfolio, however this \$5k make 6% of my total portfolio, i have other monies in commsec invested longer term,

so this is not my total position.
Work it out per account, otherwise you'll blow that account in the next 2 days

You have no idea how to position size (quite obvious as you are just buying round figures) and no idea about risk management.

You are walking down a very, very rocky road.

16. ## Re: XAO Analysis

i do look at my charts before i enter a trade, was expecting CTX to move higher today it did, but reversed, now my charts say it looks like a good short

so is MAP and MQG maybe soon.

17. ## Re: XAO Analysis

Originally Posted by clayton4115
i do look at my charts before i enter a trade, was expecting CTX to move higher today it did, but reversed, now my charts say it looks like a good short

so is MAP and MQG maybe soon.
The last time CTX traded at \$11.88 was on the 29th may

18. ## Re: XAO Analysis

yes thats when i took the trade 29 May.

well if your not going to use ROE to measure your performance what else would you use?

19. ## Re: XAO Analysis

1/06/2009

STW
Units 750.00
Total Exp \$27,675.00
Margin 10.00%
My Ety \$2,767.50
Sell Price \$37.43
Profit after brokerage \$342.50
ROE 12.38%

20. ## Re: XAO Analysis

Originally Posted by clayton4115

1/06/2009

STW
Units 750.00
Total Exp \$27,675.00
Margin 10.00%
My Ety \$2,767.50
Sell Price \$37.43
Profit after brokerage \$342.50
ROE 12.38%
Where was your stop on this one?
How did you come up with 750 units?
Why did you choose STW?
Why do you care what margin you are on?
Does the margin available change how you position size?

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