Risk Reward Ratio Quotes

Human connection had its upsides, but it sure was a lot of work. The risk-reward ratio was low, at best.

Flow is an extremely potent response to external events and requires an extraordinary set of signals. The process includes dopamine, which does more than tune signal-to-noise ratios. Emotionally, we feel dopamine as engagement, excitement, creativity, and a desire to investigate and make meaning out of the world. Evolutionarily, it serves a similar function. Human beings are hardwired for exploration, hardwired to push the envelope: dopamine is largely responsible for that wiring. This neurochemical is released whenever we take a risk or encounter something novel. It rewards exploratory behavior. It also helps us survive that behavior. By increasing attention, information flow, and pattern recognition in the brain, and heart rate, blood pressure, and muscle firing timing in the body, dopamine serves as a formidable skill-booster as well. Norepinephrine provides another boost. In the body, it speeds up heart rate, muscle tension, and respiration, and triggers glucose release so we have more energy. In the brain, norepinephrine increases arousal, attention, neural efficiency, and emotional control. In flow, it keeps us locked on target, holding distractions at bay. And as a pleasure-inducer, if dopamine’s drug analog is cocaine, norepinephrine’s is speed, which means this enhancement comes with a hell of a high. Endorphins, our third flow conspirator, also come with a hell of a high. These natural “endogenous” (meaning naturally internal to the body) opiates relieve pain and produce pleasure much like “exogenous” (externally added to the body) opiates like heroin. Potent too. The most commonly produced endorphin is 100 times more powerful than medical morphine. The next neurotransmitter is anandamide, which takes its name from the Sanskrit word for “bliss”—and for good reason. Anandamide is an endogenous cannabinoid, and similarly feels like the psychoactive effect found in marijuana. Known to show up in exercise-induced flow states (and suspected in other kinds), this chemical elevates mood, relieves pain, dilates blood vessels and bronchial tubes (aiding respiration), and amplifies lateral thinking (our ability to link disparate ideas together). More critically, anandamide also inhibits our ability to feel fear, even, possibly, according to research done at Duke, facilitates the extinction of long-term fear memories. Lastly, at the tail end of a flow state, it also appears (more research needs to be done) that the brain releases serotonin, the neurochemical now associated with SSRIs like Prozac. “It’s a molecule involved in helping people cope with adversity,” Oxford University’s Philip Cowen told the New York Times, “to not lose it, to keep going and try to sort everything out.” In flow, serotonin is partly responsible for the afterglow effect, and thus the cause of some confusion. “A lot of people associate serotonin directly with flow,” says high performance psychologist Michael Gervais, “but that’s backward. By the time the serotonin has arrived the state has already happened. It’s a signal things are coming to an end, not just beginning.” These five chemicals are flow’s mighty cocktail. Alone, each packs a punch, together a wallop.

To summarize the VWAP Reversal Strategy: After I build my watchlist in the morning, I closely monitor the shortlisted stocks in the first five minutes after the Open. I identify their opening range and their price action. The stocks will either move higher or below the VWAP. Depending on the price action, I may be able to take an Opening Range Breakout to the long or short side. I monitor the price when it moves away from the VWAP and look for a sign of weakness. If it is above the VWAP, failing to make a new high of the day may be a sign that the buyers are exhausted. If it is below the VWAP, failing to make a new low of the day or a new 5-minute low can be a sign that the sellers are gone, and the stock can be ready for a squeeze back to the VWAP. I take the trade only if I can get a good entry and a good risk/reward ratio. Remember, most of the time stocks move really fast without offering a good entry and a good risk/reward ratio. If I am short above the VWAP, I cover my short at the VWAP and bring my stop loss to break-even. If I am long below the VWAP, I sell part of my position at the VWAP, and keep the rest for a squeeze above the VWAP (or as some traders would call it, a VWAP Pop). Do ensure you bring your stop loss to break-even, because sometimes the stock can bounce back from the VWAP as well.

55. The Risk: Reward Ratio In mountaineering, climbers become very familiar with the ‘risk: reward ratio’. There are always crunch times on a mountain when you have to weigh up the odds for success against the risks of cold, bad weather or avalanche. But in essence the choice is simple - you cannot reach the big summits if you do not accept the big risks. If you risk nothing, you gain nothing. The great climbers know that great summits don’t come easy - they require huge, concerted, continuous effort. But mountains reward real effort. So does life and business. Everything that is worthwhile requires risk and effort. If it was easy, then everyone would succeed. Having a big goal is the easy bit. The part that separates the many from the few is how willing you are to go through the pain. How able you are to hold on and to keep going when it is tough? The French Foreign Legion, with whom I once did simulated basic training in the deserts of North Africa, describe what it takes to earn the coveted cap, the képi blanc cap: ‘A thousand barrels of sweat.’ That is a lot of sweat! Trust me. But ask any Legionnaire if it was worth it and I can tell you their answer. Every time. Because the pain and the discomfort, the blisters and the aching muscles, don’t last for ever. But the pride in an achievement reached or dream attained will be with you for the rest of your days. The greater the effort, the better the reward. So learn to embrace hard work and great effort and risk. Without them, there can be no meaningful achievement.

Trading/investing is all about probability and reward-to-risk ratios under specific market conditions.

With such theories, economists developed a very elaborate toolkit for analyzing markets, measuring the "variance" and "betas" of different securities and classifying investment portfolios by their probability of risk. According to the theory, a fund manager can build an "efficient" portfolio to target a specific return, with a desired level of risk. It is the financial equivalent of alchemy. Want to earn more without risking too much more? Use the modern finance toolkit to alter the mix of volatile and stable stocks, or to change the ratio of stocks, bonds, and cash. Want to reward employees more without paying more? Use the toolkit to devise an employee stock-option program, with a tunable probability that the option grants will be "in the money." Indeed, the Internet bubble, fueled in part by lavish executive stock options, may not have happened without Bachelier and his heirs.

Legg Mason was a value shop, and its training program emphasized the classic works on value investing, including Benjamin Graham and David Dodd’s Security Analysis and Graham’s The Intelligent Investor. Each day, the firm’s veteran brokers would stop by and share their insights on stocks and the market. They handed us a Value Line Investment Survey of their favorite stock. Each company possessed the same attributes: a low price-to-earnings ratio, a low price-to-book ratio, and a high dividend yield. More often than not, the company was also deeply out of favor with the market, as evidenced by the long period the stock had underperformed the market. Over and over again, we were told to avoid the high-flying popular growth stocks and instead focus on the downtrodden, where the risk-reward ratio was much more favorable.

In sum, the physical design of the drone that attacked you surely incorporates scores of insights gleaned from dozens of the industry’s best minds. There’s just no way he managed all that without assembling a team that’s second to none.” Jo could feel the insight coming, but she hadn’t quite grasped it yet. “So he had to recruit people.” “Right—” “The best people.” “Right again.” Jo’s mind was on a roll. “To do that, he’d have to compile a compelling offer.” “Such as?” “This really isn’t an area where I have any expertise. You’re the man from Silicon Valley.” “Give it a shot.” “People like that would want more than money. They’d want ‘the whole package,’ whatever that means to engineers. Stock, I assume. Bonuses.” “Keep going.” Jo drew a blank and gave Achilles a give-it-to-me look.  “You can’t steal Boeing’s best aeronautical engineer without offering something more solid than a monthly paycheck and an unsubstantiated promise. The risk/reward ratio wouldn’t work. Not for the guy everyone acknowledges to be the best.” “You’re talking about reputation,” Jo blurted. “Prestige.”  Achilles didn’t contradict her. She considered her conclusion for a second. “Ivan has a reputation, a huge reputation. He’s the world’s most notorious criminal mastermind

In trading, you accept a loss, without questioning your strategy. You make another trade, and you accept another loss, and in the third trade, when it works in your favor, you make sufficient money to cover your previous losses, if you are using a risk/reward ratio higher than 1:3 in the execution of your strategy.

Do you risk a lot to win a little? No. That’s stupid. But I’m asking you to risk a little to get a lot. It’s like believing in God.” “What is?” “Risk-reward. Everybody ought to believe in God. The risk is kind of little, going to church once in a while, maybe saying a prayer when there’s nothing good on television. Probably there isn’t any God. But if there is, the reward is pretty damn enormous when you’re dead, sitting up there on a cloud, watching all those atheists skulking along with pitchforks stuck up their asses. Risk and reward. The ratio is what’s important.

Rule 5: Success in day trading comes from risk management - finding low-risk entries with a high potential reward. The minimum win:lose ratio for me is 2:1.