Evaluating Risk-Reward Ratios with Dynamic Trade Exits

Summary

The document asks how to calculate a strategy’s risk-reward ratio when stops or profit targets change after entry. It contrasts the initial stop, which defines planned risk, with a later stop moved to break even, where recalculating risk from that stop would make the denominator zero. It also asks whether the initial target or the eventual exit should determine reward.

The only proposed method is to calculate average winning and average losing trades, then divide the former by the latter. This gives a realized, trade-outcome-based ratio that avoids using a zero-risk adjusted stop as the denominator. The excerpt supplies no derivation, worked example, or performance evidence, and does not define how gains and losses are measured or whether costs are included. It therefore offers a simple suggestion rather than a complete framework for assessing dynamic-exit strategies.

Key ideas

• Dynamic stops can make a trade’s risk-reward ratio ambiguous if risk is recalculated after entry.
• A stop moved to the entry price would make a ratio based on remaining stop distance undefined.
• The suggested alternative is to divide average winning trade size by average losing trade size.
• The excerpt does not specify how to measure trade outcomes or account for trading costs.

Tags

# How to calculate R for strategies with dynamic exit points


# How to calculate R for strategies with dynamic exit points












Calculating risk-reward ratio R is easy when trading a straight forward strategy which has its entry and exit points clear:

```
risk = entry - stop
reward = take_profit - entry
R = reward / risk
```

But what if I have dynamic exit points? For example in a trend following strategy, which after the price moves up, I move my stop_loss to break even (entry). My #1 question is, which stop_loss prices should I use, the first one or the second(which would mean risk == 0 which is a "divide by zero " problem).

Let's imagine I also move my take_profit up a few candles after entering the position. My #2 question which take_profit should I use? The one I had in mind before entering the position or the one I actually closed the position with?

Since this is to evaluate the performance of a strategy, is it a good idea to calculate it this way:

```
R = average_gain / average_loss
```

## Answer by Sully Fischer (score 1)

https://quant.stackexchange.com/a/53558

For anyone looking for this, I ended up calculating `average_win` and `average_loss` and then calculating the ratio as:

```
R = average_win / average_loss
```

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.