Risk Reward Ratio and Stop Loss in Swing trading

Trading
1

I have got little experience in short term trading, I did not record all the trades I took, I did not maintain any ledger, so I cannot possibly say if I had been profitable or not. Also, even I were profitable there was no strong strategy, no particular process, may be I just went by less than fundamental things.

Of late I have started to look at swing trading, short term trading again, this time with a better process, with some parameters as strategies, and the results have been good. I guess if I keep on doing this for sometime, the result will be even better.

But I need some advice as to the risk reward ratio and stop loss. I am not greedy, so I will book profit as per my predefined %, also these are trades for very short term, so I don’t mind even if the price doubles after booking my profit, because if my strategies get better, I will be finding more stocks which will give me my profit. My uncertainty is with the risk reward ratio and stop loss. Say if 5% is my profit, what is the ideal or the generally followed risk % and stop loss.

Is risk reward ratio of 2 alright, say I book 5% profit, and I will sell at 10% loss. Is all this subjective or some universal number is followed, at least as a thumb rule, like a moving average?

I know that if I get 2 10% losses, that essentially means my 4 profitable 5% trades are to be written off, and if I took 6 trades, 4 profit and 4 loss, it means I just broke even.

I know that risk reward ratio of 1:2 sounds good, but if my profit % is small, say 5%, then I should sell at 2.5% loss, but a 2.5% move in the price is very small movement in a day. And I will not increase my profit %, if it is 5%, I will sell if I get that, I will not wait for 1% more, so I double the risk percentage.

So any suggestions, inputs, advice?

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Risk reward is always tricky. There are some ways to tweak this.

How accurate is your strike rate/win %?
How much R do you end on an average on each wins?

If you rarely end up with 2R, there is no way keeping a target of 2R.

Then on the flipside, taking less than 2R makes you work real hard. You need to have accurate trades and have a good win rate.

In other words, you have less room for error.

I don’t feel this might have really answered your query but others can open up.

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My win rate is yet to reach any number. I have only recently started to work on some strategies again after a while, so whatever little success I have had these past few weeks is mostly because of the market, although a tiny portion can be attributed to finding such trades.

Market made me win, not my skill, not yet :grinning:

And my return will not change, no matter what. It could be an Adani stock, it could be a PSU, I have no intention of holding it if I get my predefined profit, I will sell it. So 1 R is fixed, it does not change. My question is about the other R.

If 5% is my intended profit, then RRR of 2:1 is alright or mathematically wrong? Considering the possibility that my strike rate could get better with time, so even if 2:1 is implemented, the overall profitability will be good enough for me.

One other aspect is that, I mostly trade in Nifty 500 stocks, so if the price does not reach my stop loss, I will stay in the trade for weeks, and most of the times, I know a thing or two about these stocks, so this helps me in staying put for weeks if the price does not yet reach my stop loss.

Thank you for the reply.

4

There is 2rules to apply commonly in securities markets or other that:

1. Follow the rule.
2. Break the rule when required.

You can’t have RRR of 2:1 ,3:1, 7,1 or other, it depend on position you are standing a the level of market.

 To maintain better reward to risk ratio for swing trade is 

follow trend

reversal takes at lower time frame

reversal setup have more reward but have more risk

find position price from recent swing high - low. equillibrium being 50% of it , greater the position from them great the risk and smaller the profit.

have confirmation 

two same tf candlestick merger is also a confirmation but at important level.
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5

Is your 5% equal to 2R?

The thing about trading whether you do intra or swing, you have to find the sweet spot. And it comes with more trades down the line.

For instance, deciding what time frame works for me may take 5 years. For some it may click in an year.

See, trading is very personal. There are moving parts that needs time. The best we can do, listen here and there, then mold-it to your liking, make it your own.

There maybe thumb rules, but there is nothing as such “that ought to be followed” in trading. You can have a fix R or a trailing R. You just have to see lots, to see what mostly works for you.

So, how do you know what works? Well, when you give back money but you are still left with a handful over a period of time.

After all, everything we do is just a guess. We can never know. But we can throw a certain guess/a might be. And be willing to lose a certain of money for that guess. And take a certain amount of money if your guess goes favorable.

And most important, be ready for a string of negative guesses.

This is most basic. Yet, most fail to put this in the mind. And fight all over inside.

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what people said above will get you nowhere.

you can’t define your reward but entering trade where potential gain is substansially significant than preceived is risk is possible.

what’s wrong is people calculate risk on basis of reward, as if it’s a mathematical equation

for eg. one trades, 2% reward & defines risk at 1% .
what if support is at 1.3% low,

it’s like difining random stop loss & then complaining why they get hit so often

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7

I hate to break this but every trade is random and every support or levels is always not the case.

One can only find what works for them with law of large numbers. But people seldom will have the grit to stick and find what works.

We tend to give suggestions based on what we experience. So, calling out to people that what they suggested is sheer bs is pretty immature.

Cuz in trading, you can even learn bits and pieces from a novice who just started.

Respect every one man. Do not push your opinion, when it comes to trading.

I find this a bit rough. Not that I am not offended, but it might hamper others to fill their thoughts.

But we just have to show, we are … Ah, Humans.

8

Holding trade after reversal is given price will always be risker, on the basis of RRR. I have experienced the same, that why saying this. No one know when will potential reversal before entring the trade.

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do you know why? beacuse it’s not as simple as it looks

the way people mark support just by plotting a horizontal line where price is touched several time. this way it’s ought to be broken

I had a trerrible time listening to other, while not thinking myself

get over theory.

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It’s okay. Have a good day. Stay safe.

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no need to know reversal. but we can atleast increase the chances of getting right

if not, then why do you use chart, volume, price action etc, we are trying to increase probability only

if that’s the purpose then why don’t we do it correctly? think again

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you too

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Thank you for the replies people.

I have the temperament to stick to a plan, so I know that I will get better with experience by taking more number of trades and I also know that a lot of these are personal and subjective.

I was trying to find if any thumb rules or widely accepted or followed things exist like moving averages. Investors who have very good fundamental knowledge of a business don’t necessarily follow technicals, but investors who don’t have such deep knowledge follow moving averages, 200 MA in particular.

So I wanted to know if such self fulfilling prophecies exist for shorter time frames too.

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If my intended profit is 5%, the risk I can take is 10%. If I think 10% is more, then I should reduce both risk and return accordingly, return 3% and risk to 6%.

So despite the subjectivity of the ratio, I am looking if any rational explanation exists that plainly tells me that return should be at least 2 times that of risk, and that what I am doing is wrong.

If what I am doing is wrong, the 2:1 ratio, then either I have to learn more and develop skill to achieve 1:2 ratio, or I continue with my 2:1 ratio and make sure I get more number of hits than misses.

15

I am yet to reach this point in trading, I guess what you are saying will happen after sometime, after gaining some experience.

I guess what you have mentioned requires some experience, more capital and more seriousness, I am yet to get there.

Thank you.

16

You must do your own work. Take many many trades and figure out what works better for your system.
With small sample size you have no info, only noise so you will optimize to noise. But you can get ideas from small sample size and then test those ideas over large sample size.

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17

Yep, that is the idea.

Also, I wanted to know if there exists some kind of textbook structure that I should know, along with my own way of understanding and experiencing. Because, despite the fact that a lot of things in the investing world are subjective and arbitrary, there exists mathematical and quantitative aspects too, so I have asked.

18

In my experience so far (intraday only), atr based stops have been just as good as anything else. Beyond that you can look at pivots or % or n bar trails etc. Lot of the ideas can come to you as trade day by day and then we have to do the hard work of testing it. Mechanical tests can greatly simplify this whole process. Purely discretionary traders might disagree and they may have ‘better’ ways to do things but only way to confirm it ( for themselves) is to do your best with same system with both styles and then compare.

What i do is first test entry signals with varying stop distance and some predefined n bar or time based exit. That gives some indication of range of possible stop locations and approx time to hold. Then i try to test other trade management rules on top of that one by one and see if it helps - different types of trailing / targets etc. Only if they clearly help, do i consider adding complications to system. Different system will have some similar and some different behavior so we have to check what sticks over large sample size.

Plus use some common sense + accept that there is decent chance of over optimization in this process as we might end up including positive shock events in our sample size and excluding/mitigating negative shocks. These shocks ( say large gap against etc) would largely be random in future hence the over optimization to past data.

Good sample size - say in thousands will have less issue. Plus can look at say year by year breakdown, look at worst periods and other ways to check that we are not curve fitting and then accept that actual live results would have some degradation and that cant be helped.

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19

I need some time to understand, absorb and practice what you have said.

Thank you.