Tag Archives for " Risk to Reward Illusion "

The Fallacy of Risk-to-Reward Assumptions

     Some Things Seem True, But . . .

Just Because They're Repeated Doesn't Make Them True . . .

By George R. Harrison

The Myth of Risk-to-Reward

Every so often, maybe once a year or so, I receive an inquiry about Risk/Reward ratios. Well, my conclusion after 50-years or so is that they're largely an institutionally-taught illusion having little reality in the real world at all.

Every risk in real life is different according to the risk-management profile of the individual trader. What's more, each and every gain calculation is only theoretical and can only be theoretical.

In short, Risk-to-Reward is a mere guess that has no foundation in Reality; only in what we'd like Reality to be. With no basis for either number, what good will the resultant ratio be?

Well, that's my observation based on my experiences anyways.

I've watched good traders go down with trades that had great Risk-to-Reward Numbers while trades with dismal numbers 'woke up' suddenly (and, unexpectedly) to make gains undreamed of and beyond the anticipation of Risk-to-Reward calculations of any kind.

In the end, the risk of a trade is up to you, the trader, and the reward is different every time. People who give those numbers are following a system that can only and which will fail because the formula's basic premise is flawed and un-rooted in reality.

Natural law means following Nature and it's structures, and Nature is not as systematic (in the consistent way that mankind is seeking) regular in doling out her rewards on the short-term as we'd like.

But, she does build trends based on variable outcomes combined over time.

The keyword here is 'variable'. As Nature herself is variable, how can one produce an unvarying & reliable Risk/Reward Ratio when this ratio is based on Natural Law as applied to the variable markets. You see the problem? Think on it a bit.

Thinking outside of the conventional BOX is hard for some people, they want rigid rules but, rigid rules break and betray them in the long-term.

That is what's happening in the world today, people have been following 'Fantasy Rules' and they're finally becoming painfully aware that the World isn't responding to their wishes or tantrums. Their collection of 'rules' aren't working. They've strayed too far from Nature, it's natural mathematical design and, Rules that actually DO WORK.

I give all my trading clients their due respect as to how they wish to apply the methods they learn. It's their Life and their decision on how they want to run it.

That's what Freedom's about; freedom to choose your own way and Path. Of course, that said, there are 'hard' paths and 'easier' paths out there to take.

I've seen clients take huge, 'shoot-the-moon' risks with normally close stop methods that have worked excellently in  the past, by 'bending' the rules because of their personal whims. That's their Choice. The consequences are theirs as well.

I've also seen other clients take the simplest of methods and make fortunes by Disciplining themselves to control risk and by being Patient. Their Rewards were guaranteed as well. They chose the 'easier' Path of Consequences by being harder on themselves through Discipline and Patience. They chose Wisely.

Who can fault it? It's a Perfect System at work and, we all get our deserved rewards from Wisdom or deserved punishments by 'cutting corners'.

In either case, the Risk/Reward formulas for either type of trader meant nothing in the end as Trader Behavior Overrules Everything. - (C) 2017 - GR Harrison, USVI

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