{"id":4330,"date":"2017-01-11T12:00:49","date_gmt":"2017-01-11T17:00:49","guid":{"rendered":"https:\/\/www.optimusfutures.com\/tradeblog\/?p=4330"},"modified":"2017-01-11T12:00:49","modified_gmt":"2017-01-11T17:00:49","slug":"asymmetric-risk-return-payouts","status":"publish","type":"post","link":"https:\/\/optimusfutures.com\/blog\/asymmetric-risk-return-payouts\/","title":{"rendered":"Asymmetric Risk and Return Payouts in your Trading"},"content":{"rendered":"

A good trading system should be designed to achieve asymmetric returns by analyzing the potential outcome of a trade and only triggering those trades where the odds are skewed in your favor using asymmetric risk and return profiles. Asymmetry is one of the variables of a\u00a0trading system<\/a>\u00a0with potential positive expectancy, and the ability to identify trades where the probability of a positive outcome is greater than the negative is essential to a good trading strategy. This article will explore the important aspects that can help you integrate asymmetric concepts into your own futures trading strategy.<\/p>\n

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What is an asymmetric risk and return profile?<\/h2>\n

Asymmetric risk and return means that the payout of a profitable trade is significantly larger than the potential loss. It also suggests that a trader needs to control his downside, limit his losses and then look for trading opportunities with significantly larger odds for a potential profit. The phrase \u201ccut your losses short, let your profits run\u201d is at the core of this trading method.<\/p>\n

A trading method with asymmetric risk and return profile\u00a0is characterized by a return distribution graph with fat tails. In statistics, fat tails are used to describe a distribution where outliers have greater weight and specific return data does not cluster as strongly around the mean. In contrast, most traders\u2019 profit distribution looks more like a normal distribution where each trade provides approximately the same outcome and data points are scattered around the mean without significant outliers. Some would refer to this as trading without an edge because the better odds usually “reside” around these outliers.<\/p>\n

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\"asymmetric<\/a><\/p>\n

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Risk assessment is the starting point for every trade<\/strong><\/h2>\n

Most traders skip risk assessment and never look beyond entry timing. Before you enter a trade, you should compare the risk and return profile of the trade and evaluate whether it offers an asymmetric opportunity or not. In other words, does the trade set-up have an asymmetric profile where you have higher odds of success than failure. In that regard, you need to evaluate where you want to place your stop loss and where your profit target would go. Then you should compare the potential gain and the possible loss. If the win ratio is large enough, the trade could offer you an asymmetric return. However, this is just the starting point, and we will explore the next steps below.<\/p>\n

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Knowing the difference between your trades<\/h2>\n

Trade 1<\/strong><\/p>\n