The Fallacy of Using SL/TP as Proxy Risk-Reward

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DerPat
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by DerPat »

I really have to say thank you for starting this thread and pointing me to a good source. I always thought like, those people who say, you have a statistical edge if you have a 1:2 or 1:3 Risk Reward ratio, do in reality say that they have no glue about statistics. The proposed method here is the most realistic I have ever seen in terms of numbers. If you are able to read patterns and support and resistance levels, I would recommend you use those for SL and TP, as the market mainly reacts to them. However the number only approach is really something I will have a look in.
One reason I usually try for a larger reward than risk, is that I wait for prices to be on a sport, where I can achieve those. Saying that, the statistical edge might just be at the end: stay away from trades where it is really unlikely to achieve less than 1:2 or 1:3.
afeudale
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by afeudale »

I usually have the opposite profile: my risk:reward is around 3:1 on average.

At the end of the day it doesn't matter. If your risk is higher than your reward, you better be winning more trades than you lose. If your reward is higher than your risk, you can suffer more losing trades and still come ahead with big winning trades.

My preference for the larger risk to reward is only due to my observation of forex, where risk is proportional to where you place your stop losses. On the pairs I trade (and most I've seen), the volatility is high enough that anything but a far-away SL would have me losing every time.

The SLTP indicator I use from forexop supports this - it has never produced a TP/SL value that is 1:1. It is always SL>TP.
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DerPat
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by DerPat »

@afeudale: could you do me a favor and compare take profit, stop loss with average true range bands. As it looks like, the stop loss of this guy is usually around 2 lines away from the current price and take profit is less then one line away. I know that some use ATR bands, as prices usually not go 2 or 3 times ATR. This is not a recommendation and not the way I regularly trade. I think for intraday trading and scalping, a less then 1 R is OK. A lot do it successfully.
ATR Channels.ex4
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afeudale
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by afeudale »

@DerPat. Sure, no problem, I will test on market reopen.

But on initial observation, I think the SLTP indicator fluctuates much less than the ATR channels.

Also, the SLTP indicator has three options which ATR bands don't. 1. Random Walk expetced, 2. Trend continuation expected, 3. Trend reversal expected

With (1), the SLTP will be equal on both sides of PA. With option (2)/(3) it also calculates the rate of change of the trend, so the SL/TP lines will be uneven around PA.
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DerPat
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by DerPat »

I would currently interpret this as follows:
- random walk, Stop between 2 and 3 lines away from current price and TP less then 1 ATR line away
- trend, Stop between 1 and 2 lines away from current price and TP same

Looking forward to your observations. Thank you in advance.
afeudale
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by afeudale »

Sorry for the delayed reply....

I attached 3 snapshots of the SLTP indicator vs ATR Channels (D1,H4, M15).

At first glance I would say that, no, they aren't really correlated and could not be used interchangeably.

I have lines on my chart which mark the TP and SL for the SLTP indicator (blue is TP, yellow is SL).

In the D1 chart for example, the bottom TP is well below the 1st line of ATR, and the top TP and SL are well outside even the 3rd line of ATR.

H4 the bottom levels seem ok, but top levels are way off.

Only in M15 does it seems close - bottom TP is between ATR 1st and 2nd line. Bottom SL is close to ATR 3rd line.

Hope that helps.
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DerPat
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by DerPat »

Thank you. His math is not that easy. This is what we know now. This stops are really far away. Interesting and shocking at the same time. Hope I never do this :D
afeudale
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by afeudale »

Yes, from my experience with a few of their indicators, the math is a bit advanced. Even from the description page, the use of maximals for determining SL/TP is an advanced idea.

I've been using it very successfully so far and would say it's the most useful indicator I have. Takes the guesswork out of things.

They say most traders are quite good at predicting trends, but either get stopped out too soon, or fail to achieve their TP before a correction. So properly placing SL/TP is one of the most important tasks for success.

I believe those who place SL/TP arbitrarily (i.e. 10, 20, 30 pips away) are just being foolish.

The ATR Channels does seem decent though and is based on actual market technicals.
illiquid
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by illiquid »

Thanks for your screenshots, afeudale!

It's amazing which TP / SL values the indicator calculates. Is anything but what is recommended by most people. Would be interesting to test this forward to check the values. I need to trust this indicator since I can't understand it :geek: :lol:
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The Fallacy of Using SL/TP as Proxy Risk-Reward

Post by SteveHopwood »

illiquid » Sun Nov 13, 2016 8:17 pm wrote:Thanks for your screenshots, afeudale!

It's amazing which TP / SL values the indicator calculates. Is anything but what is recommended by most people. Would be interesting to test this forward to check the values. I need to trust this indicator since I can't understand it :geek: :lol:
I caution strongly against trusting an indi developed outside SHF. You have no idea what the motive of the original developer was.

Stuff developed here at SHF is different. Our motives are clear and software developed at SHF can be trusted. Dimwits are uncovered and booted out very quickly.

Up to you whether you take any notice of me or not. Fact is, I am highly suspicious by nature, and am keeping a close eye on events here.

All of a sudden, so are the rest of the SHF mods.

:xm:
Read the effing manual, ok?

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