If an "educator" pushes the "high risk reward" on you, he lies.
First let me say that this risk to reward they talk about is not the risk to reward ratio. It is like they have been holding books upside down their whole lives.
It is the reward to risk ratio. If they call it "riskreward" for short it's fine I guess, but specifically calling in the risk TO reward is so wrong.
There are ways to see if someone lies without the shadow of a doubt. Most things are small mistakes imperfections, but in certain cases there is 0 doubt, that guy is NOT a trader!
Lie number 1 - Not the shadow of a doubt about this. 100% guarenteed.
"Mu risk management allows me to avoid drawdowns. Because I risk 1 to make 3 my risk is minimal."
This is obviously a thing we seem to hear very often, and a catch phrase people that "heard something somewhere" like to make. It is made by clueless people that either never made money in the market or made alot of money very fast due to INCREDIBLE LUCK (out of thousands of losers there is always going to be a handful of very lucky ones), and this catchphrase is targetted to complete noobs. Sure, it seems attractive to them "risk little to make alot". Lmao even when I was 8 years old I did not fall for that. I can't believe grown adults actually fall for that, beginner or not.
So let's look at 2 traders. Their edge is the same. 1 risks 1 to make 1 the other risks 1 to make 3 "muuh high risk to reward".
They risk the same each trade, no the 3 to 1 person does not risk less because if his losers were 3 times as small then his winners would be smaller too and his growth much smaller.
0.6*(1+1) = 1.2
0.3*(3+1) = 1.2
Here. Trader 1 has 60% winrate and 1:1 risk reward. Trader 2 has 30% winrate and 3/1 Reward/Risk. Their edge is the same.
Correct me if I am wrong but the high risk reward one would have to double his risk since he needs twice as many trades (or risk) to get the same 1.2 result.
But anyway, let's keep it at equal risk to give an advantage to the "risk management" people.
Trader 1 has 60% winrate. The odds of him having 5 losers in a row are (1-0.6)^5 = 1%. It's not super frequent but it WILL happen innevitably if he is active.
Trader 2 has 30% winrate. The odds of him having 13 losers in a row are 0.7^13 = 1%. THIRTEEN losers in a row. And it happens as often as 5 for Trader 1.
We assumed they had the same growth while risking the same.
Trader 1 account balance:
Trader 2 account balance:
The "risking small on trades is much easier emotionally" joke is so absurd. How can people not crack up when they see this load of bologna?
Oh and if these 2 digit IQ strugglers argue that they do not experience BIG and I mean really BIG drawdowns then that implies they have high winrate.
So... high risk reward AND high winrate. They manage goldman sachs yet? On Fortune 500? Haven't seen 1 of their names yet.
Or the other possibility is they risk 0.01% per trade or something. LoL. "Risk 2% per trade" Ye right. Down 25% on a regular basis?
Lie number 2 - An example of a lie that is not 100% guarenteed a lie but is very very fishy is these guys with years of experience talk about risk to reward but never is winrate mentionned. After 10 years they can't make a guesstimate of an expected/realistic winrate?
Sometimes you can watch interviews of them it's so hilarous. How do people not see the elephant in the room? "What do you think about Tesla?" "Oh Tesla. very tricky Veeery very tricky". "Talk to us about that trade you said you remembered perfectly, what happened back then why did prices go up" "Ummm so I don't remember exactly why ummm there was the FED and emmm dollar and ummm news or something". Rofl. COME ON. People fall for that?
And how are some of these scammers so unprepared? They're so lazy they could not spend a few hours studying about markets to understand a bit and be able to answer questions with more than vague generic answers... Well I guess if they wanted to put work into anything they wouldn't be scamming so there's that...
The only formula you need about risk to reward is:
Winrate * ((Reward-spread)+(risk-spread)) > 1.
If you have a system with this, first calculate your risk of ruin to establish how much at most you can risk per trade, second make sure if all your correlated trades had massive slippage of 25 ATR one day (EURCHF did 15-20 ATR I think) could you sustain that? Or would it kill you?
Then simply run the system. EASY. That's all. That is the full extant of "Muuuh risk management".
The only part that takes time it actualy making sure your positions are uncorrelated.
And also remember making sure you have a backup internet access, making sure even if you messed up about correlations you still can't blow up with a massive surge in price, what if broker goes bankrupt, etc.
It is the reward to risk ratio. If they call it "riskreward" for short it's fine I guess, but specifically calling in the risk TO reward is so wrong.
There are ways to see if someone lies without the shadow of a doubt. Most things are small mistakes imperfections, but in certain cases there is 0 doubt, that guy is NOT a trader!
Lie number 1 - Not the shadow of a doubt about this. 100% guarenteed.
"Mu risk management allows me to avoid drawdowns. Because I risk 1 to make 3 my risk is minimal."
This is obviously a thing we seem to hear very often, and a catch phrase people that "heard something somewhere" like to make. It is made by clueless people that either never made money in the market or made alot of money very fast due to INCREDIBLE LUCK (out of thousands of losers there is always going to be a handful of very lucky ones), and this catchphrase is targetted to complete noobs. Sure, it seems attractive to them "risk little to make alot". Lmao even when I was 8 years old I did not fall for that. I can't believe grown adults actually fall for that, beginner or not.
So let's look at 2 traders. Their edge is the same. 1 risks 1 to make 1 the other risks 1 to make 3 "muuh high risk to reward".
They risk the same each trade, no the 3 to 1 person does not risk less because if his losers were 3 times as small then his winners would be smaller too and his growth much smaller.
0.6*(1+1) = 1.2
0.3*(3+1) = 1.2
Here. Trader 1 has 60% winrate and 1:1 risk reward. Trader 2 has 30% winrate and 3/1 Reward/Risk. Their edge is the same.
Correct me if I am wrong but the high risk reward one would have to double his risk since he needs twice as many trades (or risk) to get the same 1.2 result.
But anyway, let's keep it at equal risk to give an advantage to the "risk management" people.
Trader 1 has 60% winrate. The odds of him having 5 losers in a row are (1-0.6)^5 = 1%. It's not super frequent but it WILL happen innevitably if he is active.
Trader 2 has 30% winrate. The odds of him having 13 losers in a row are 0.7^13 = 1%. THIRTEEN losers in a row. And it happens as often as 5 for Trader 1.
We assumed they had the same growth while risking the same.
Trader 1 account balance:
Trader 2 account balance:
The "risking small on trades is much easier emotionally" joke is so absurd. How can people not crack up when they see this load of bologna?
Oh and if these 2 digit IQ strugglers argue that they do not experience BIG and I mean really BIG drawdowns then that implies they have high winrate.
So... high risk reward AND high winrate. They manage goldman sachs yet? On Fortune 500? Haven't seen 1 of their names yet.
Or the other possibility is they risk 0.01% per trade or something. LoL. "Risk 2% per trade" Ye right. Down 25% on a regular basis?
Lie number 2 - An example of a lie that is not 100% guarenteed a lie but is very very fishy is these guys with years of experience talk about risk to reward but never is winrate mentionned. After 10 years they can't make a guesstimate of an expected/realistic winrate?
Sometimes you can watch interviews of them it's so hilarous. How do people not see the elephant in the room? "What do you think about Tesla?" "Oh Tesla. very tricky Veeery very tricky". "Talk to us about that trade you said you remembered perfectly, what happened back then why did prices go up" "Ummm so I don't remember exactly why ummm there was the FED and emmm dollar and ummm news or something". Rofl. COME ON. People fall for that?
And how are some of these scammers so unprepared? They're so lazy they could not spend a few hours studying about markets to understand a bit and be able to answer questions with more than vague generic answers... Well I guess if they wanted to put work into anything they wouldn't be scamming so there's that...
The only formula you need about risk to reward is:
Winrate * ((Reward-spread)+(risk-spread)) > 1.
If you have a system with this, first calculate your risk of ruin to establish how much at most you can risk per trade, second make sure if all your correlated trades had massive slippage of 25 ATR one day (EURCHF did 15-20 ATR I think) could you sustain that? Or would it kill you?
Then simply run the system. EASY. That's all. That is the full extant of "Muuuh risk management".
The only part that takes time it actualy making sure your positions are uncorrelated.
And also remember making sure you have a backup internet access, making sure even if you messed up about correlations you still can't blow up with a massive surge in price, what if broker goes bankrupt, etc.
Nota
I have a little annectode for you.I got a friend, my best friend when I was in high school.
He worked with Jerôme Kerviel back in the day.
What does he do now? Risk management XD
Too bad he only still was a student back then...
Man when people go crazy and start opening several positions. Just so funny. This isn't risk management it's crazy management.
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Aviso legal
As informações e publicações não devem ser e não constituem conselhos ou recomendações financeiras, de investimento, de negociação ou de qualquer outro tipo, fornecidas ou endossadas pela TradingView. Leia mais em Termos de uso.