The “Reasonable” Reward-To-Risk Hornet Portfolio

The “Reasonable” Reward-To-Risk Hornet Portfolio

Sept. 15, 2023

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This week we’ve seen a few examples of “bad” reward-to-risk systems that show excellent testing.

And we know that there is no such thing as a good or bad reward-to-risk ratio.

Getting a 5 to 1 return on a trade when you barely win is not as good as getting a small win a higher percentage of the time.

The math proves it.

That said, big stoplosses are scary!

What if I get a huge loss on my very first trade?

Won’t I fall deep into a hole?

That would stink, and yes.

Is there anything we can do about that?

Also yes.

We can decrease the stoploss.

In today’s example, we’ll use the exact same JPY Hornet portfolio with the exact same settings we used before.

Except this time we’ll cut our stop in half.

With this portfolio, the stop is only 2.5x bigger than the profit target. In our last example, the stop was about 5x as big as the profit target.

Did increasing our reward-t0-risk make it better?

Let’s see.

Here’s the new, more “reasonable” Hornet portfolio from 2017-2023 trading 1 lot each time on six JPY pairs via Portfolio Architect:

Well, isn’t that interesting?

Granted, this “reasonable” portfolio still looks great. It hypothetically makes over 500%.

But it doesn’t look as great as our “terrible” reward-to-risk portfolio from last time:

The “terrible” one hypothetically makes over 700%.

Improving our reward-to-risk ratio made the results worse.

While a “better” ratio and a smaller stop would feel better psychologically, a “worse” ratio performs better mathematically.

Who knew?

I’ll be back next week with more systems.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.