[jonbig04]

A friend of mine is just starting to trade (aren't we all) and in trading YM he has discovered that if he uses a 20 point stop, and a 6 point target, he will make money. Now, to me, nothing could be more ridiculous. The fact is though that he seems to be green over the past few weeks. Of course the large stop gives him very high accuracy, enough to be profitable over the past few weeks. But to me this seems very unsustainable, I mean risking 20 to make 6? However I can't seem to convince him. He says the negative r/r doesn't matter because the accuracy makes up for it. What would you tell this person? Am I wrong for trying to steer him clear of what looks to me like a huge dead end? My accuracy has been around 25-28%, taking trades with a risk reward of 1:8 to 1:10 so this goes against everything that I do. Any ideas?

[MidKnight]

One can't really say if he is wrong without more information. How large is his sample of trades? What is the % winner? Does he either take the stop or the target, or is that just his initial placement when the trade begins and then it is modified later. Most successful scalpers that I know of do have the r:r in reverse or at beast 1:1. I've seen many that have it at 2:1 or 3:1. Its just another way to do it. Both ways can work.

[jonbig04]

He takes 12 or so trades a day, for the past 3 weeks or so. From what hes told me winners are usually around 80%. His r/r is 3.33:1. It just seems insane to me.

[brownsfan019]

Risk-Reward is one of those things that some live and die by and others can ignore. Both schools of thought can make money and both can lose.

With an inverted Risk-Reward it's then a matter of winning %. If that is high enough regularly, then you can make money no problem. It could actually be easier for some to do it this way b/c they are constantly winning, constantly pulling $ out of the market. Of course, a stop out will put a damper on that winning attitude.

With a standard Risk-Reward, winning % is marginally important. I am more on this side of the equation currently in my trading. I'm seeing approx a 40% win rate in these markets but getting rather large wins on the winners. That's the tradeoff I am willing to make - reasonable stops with decent sized targets. My stops will more than likely get tripped more than the other scenario, but for me personally it's a little easier to put the stop where it 'should' be and then re-enter if need be vs. putting a large, random stop on and hoping it holds.

But your friend can make money at this as long as the winning % is high enough to offset those 20 pt losses. I wouldn't make the assumption it can't be done - it can, but will be difficult at times.

[MidKnight]

Keep your mind open John. Many many ways to make trading work. The numbers you showed though, has a negative expectancy. He needs better than 80% or a slightly less inverted R:R to make money. What he has now will lose money due to comms in the long run if the numbers you gave are stable.

[Hlm]

It doesn't have anything to do with negative or positive risk reward. It has everything to do with positive expectancy.

Assuming 3.33:1 and 80% ...going off of 30 trades...

Wins: +24pts (24*1)
Losses: -20ts (6*3.33)
Profit = +4pts (appx)

But like MidKnight said, your commissions would have to be less than $0.67/rt to make money in this simple example.

However, there is still one piece of the puzzle missing. Commission only comes into play per transaction. So if his strategy was going for much larger swings, then it could be profitable strictly by the numbers.

[zdo]

slighty but

Odds are it will be <> 20, not 20 tick losses that take your friend down...
(...especially the > 20 variety)

...now how would I know that ?

[zdo]

More how would I know that ?

Tell your friend to refine it to at least 1:2.1 w/l size and >93% w/l rate
and get very proficient in sizing mm - then he'll have fun at his game...