Risk to Reward ratio….

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I’ve been meaning to write this post for some time now after receiving a message from somebody on the Facebook page. It’s not the first time when talking to someone just getting into trading the markets on Betfair this has come up. I’ve just had a look for the original message but with so many over the last week I can’t find it so I’ll do my best to explain.

The topic of points to get out the market and get in are always pretty much top of the list, along with how many ticks profit should you take and how many ticks loss should you take. My answers to these questions are pretty much always the same, aside from the obvious ones its impossible to answer! Mainly due to each situation being unique and certainly not as cut and dry as get in here and out there. One thing is always the same though – it’s always better to offer a price than take one, now there may be situations where you expect the market to start moving quite quickly and don’t want to miss the trade so taking the price has to happen but give the choice I’ll always offer first, just think each time you take a price instead of offering one had you been filled you have given away a tick. Times that by 10 over the day maybe, potentially that’s 70 a week and 280 ticks over the month!! Offering a price is also quite a positive thing as if the trade you just entered goes wrong with the market moving against you then you’ve made that red position one tick smaller.

Going back to the message on Facebook I was asked, it went something like this:

‘If i’m scalping away taking one and two ticks at a time and the market goes against me, how far should I let it go before I close out for a loss? I keep a rough stop-loss of about 4 ticks but I find overall although I judge the price well I still lose!’

Can you see whats not quite right here? Firstly I’d say its tough to say as there is the odd situation where the price bounces against you and I’d deem it ok to hold on – mainly based around what I expect is happening in that given moment in the market. But you can see from the original posters question no matter how good they are at judging the market they have set themselves up for a fall. Reason being they are entering the market attempting to take 1 or maybe 2 ticks profit routinely, but in doing so they are willing to lose up to 4.

So the Risk (4 ticks loss) v’s Reward (1 or 2 ticks) ratio is 1/4 worst case. Now just consider the price can only go two ways, up or down! Effectively the trader is betting odds-on for a 50/50 situation – probably not the best idea in the world as to just break even you would need to be correct about the 50/50 gamble 75% of the time (3 out of 4).

If we was to take the same situation and said im only going to allow myself the same outcome either way profit or loss and only offer a price then the chance of success would be far higher regardless of your market reading skills as it’s a situation where you’re placing a 50/50 bet profit or loss wise on a 50/50 situation and with the added advantage of offering a price you will have at the very least given yourself the advantage of a bit of time with the trade open in most cases, if you was correct more than 50% of the time then you’re in profit! which is far better than the original question where you’d have to be right 25% of the time more to break even.

Hopefully this image makes the point a bit clearer. It’s like betting on odd’s on horses – You’ll be right a lot of the time but the losses will kill the overall profits and some.

Potential win Potential loss

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