Reward/Risk Ratio: useful or useless? - Aussie Stock Forums

# Thread: Reward/Risk Ratio: useful or useless?

1. ## Reward/Risk Ratio: useful or useless?

reward-risk-ratio.jpg

Hi everyone

When I calculate Reward:Risk Ratio. I always stuck in how to figure out the target price.

For example, look at this chart.

1. entry from pivot low at 7.1

2. placed sell stop at 5.9 (under pivot low)

3. my Risk/Share = 1.2

4. Identify target price. Here comes the hardest part I will divide it to 2 scenarios.

4.1) Optimistic
I guessed that it will return to top again.
Reward = 12-7.1 = 4.9
Reward : Risk = 4 : 1

4.2) Pessimistic
I found that at 9.0 is a strong base before break down. Then I think that it will return to 9.0.
Reward = 9.0-7.1 = 1.9
Reward : Risk = 1.6 : 1

Only the pessimistic scenario make sense for me. Then I skip this trade because the reward:risk is not more than 3:1.

But things don't always work out the way we want them to. I figured out that this reward:risk system frequently prevent me from good trade ( 5R or more) and many pessimistic scenario turned out to be homerun.

Then I think that Reward:Risk system is useless for me or I can't figure the most probable reward.

If you have any method to determine the price target (eg. fibonacci projection, Elliot Wave etc). Please suggest. Thank you.

2. ## Re: Reward/Risk Ratio: useful or useless?

No matter where you set your reward level, anything can happen. It can seem a bit pointless setting it, but I look for overhead resistance and trendlines.

3. ## Re: Reward/Risk Ratio: useful or useless?

Set a tighter stop, eg at 6.7 approx from the chart.

So you're risking 0.4 with target of 9c = 1.9 potential -> 4.75 R:R

Maybe also at 9c, you reassess and only sell 1/2 the parcel, move stop to breakeven, and set the target for the rest of ur shares to 12c

4. ## Re: Reward/Risk Ratio: useful or useless?

Technically you want to know your R/R on closed trades.
The money is made here and you can determine better R/R by doing various things with the initial R/R as sky quake has mentioned.

In the end the accumulated risk / trade will be divided into the Accumulated Reward on closed trades to determine your ACTUAL Reward to Risk.

If you really must look at a possible R/R (As GB points out) I use the next likely support or resistance level.
As you know by moving initial stops toward Break even you'll decrease the long term closed R/R.

5. ## Re: Reward/Risk Ratio: useful or useless?

Finally I've got the answers from gurus here.

Originally Posted by Gringotts Bank
No matter where you set your reward level, anything can happen. It can seem a bit pointless setting it, but I look for overhead resistance and trendlines.
That's why sometimes I prefer to use %Risk more than R/R especially in strong bull market.

Originally Posted by skyQuake
Set a tighter stop, eg at 6.7 approx from the chart.

So you're risking 0.4 with target of 9c = 1.9 potential -> 4.75 R:R

Maybe also at 9c, you reassess and only sell 1/2 the parcel, move stop to breakeven, and set the target for the rest of ur shares to 12c
You've made my day skyQuake. It is a very good strategy. IMO it needs a bit of fine tuning the stop for high volatility stock.If anyone could share their experiences it would be greatly appreciated.

Originally Posted by tech/a
Technically you want to know your R/R on closed trades.
The money is made here and you can determine better R/R by doing various things with the initial R/R as sky quake has mentioned.

In the end the accumulated risk / trade will be divided into the Accumulated Reward on closed trades to determine your ACTUAL Reward to Risk.

If you really must look at a possible R/R (As GB points out) I use the next likely support or resistance level.
As you know by moving initial stops toward Break even you'll decrease the long term closed R/R.
As you and GB said that the overhead S/R is considered for reward level. In case of no overhead resistance, the target price is open-ended and clear blue sky. Are you still evaluating R/R ?

Generally I will exit 1/3 at 30% gain, 2/3 at 50% gain and leave the rest for the price to touch the ATR stops(Sorry for such a stupid question I'm just a novice trader). Thank you in advance.

6. ## Re: Reward/Risk Ratio: useful or useless?

Originally Posted by Elextons
You've made my day skyQuake. It is a very good strategy. IMO it needs a bit of fine tuning the stop for high volatility stock.If anyone could share their experiences it would be greatly appreciated.

As you and GB said that the overhead S/R is considered for reward level. In case of no overhead resistance, the target price is open-ended and clear blue sky. Are you still evaluating R/R ?

Generally I will exit 1/3 at 30% gain, 2/3 at 50% gain and leave the rest for the price to touch the ATR stops(Sorry for such a stupid question I'm just a novice trader). Thank you in advance.
For blue sky stocks with no apparent overhead resistance, consider a longer timeframe on your chart and you will almost always be able to find a trendline that will come into play as resistance. The other way to do it for that type of stock would be to plot a trailing volatility stop and let that take you out. In order to be able to move your stop to break even, you need as solid an edge as possible. Without a solid edge, that possibility of moving the stop to break even disappears... and hence your closed RR suffers.

[nb. Not a guru].

7. ## Re: Reward/Risk Ratio: useful or useless?

Originally Posted by Gringotts Bank
For blue sky stocks with no apparent overhead resistance, consider a longer timeframe on your chart and you will almost always be able to find a trendline that will come into play as resistance. The other way to do it for that type of stock would be to plot a trailing volatility stop and let that take you out. In order to be able to move your stop to break even, you need as solid an edge as possible. Without a solid edge, that possibility of moving the stop to break even disappears... and hence your closed RR suffers.

[nb. Not a guru].
Thanks Gringotts Bank. very helpful guideline for my system development.

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