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2013issue C016-7

The average directional index as a lookback cluster and a risk-reward bound

A rebuilt directional-movement worksheet was to be read by plotting the average directional index, the plus directional indicator, and the minus directional indicator as three separate lines. Lookbacks were restated in short clusters, and a later reply said there is not always a single optimal risk-reward ratio or exit strike rate.

  • The rebuilt worksheet was to be read by plotting the average directional index, the plus directional indicator, and the minus directional indicator as three separate lines.
  • The restated lookbacks for the average-directional-index cluster lines are 3, 4, and 5. Both directional-indicator lines use 5, 8, and 14, not a third setting of 13.
  • The method was described for end-of-day charts, with intraday signals characterized as generally harder to handle, and a calculation sidebar was said not to implement the trend-start method.
  • No archive item answered the profitability identity that pairs risk-reward ratio with strike rate, and the reply said there is not always a single optimal pair.
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Current trackRisk-reward ratio78 readingsAverage Directional Index79 readings

A written parameter set

A rebuilt directional-movement worksheet was to be read as three separate lines rather than as one unmarked default. TradersWeek editorial reading: treat that recipe as a written parameter set. Record the lookback cluster on each line before a signal is read, and record a risk-reward bound before entry, because neither the indicator settings nor a payoff ratio arrives as a single universal default.

How the rebuilt worksheet was read

The rebuilt worksheet was to be read by plotting the average directional index, the plus directional indicator, and the minus directional indicator as three separate lines. The average directional index is a smoothed comparison of net directional movement with total directional movement, shown here as one line in a small lookback cluster. The plus directional indicator is a lookback-smoothed measure of upward directional movement, plotted with its downward counterpart. The minus directional indicator is a lookback-smoothed measure of downward directional movement, plotted with its upward counterpart.

The method was described as applying to end-of-day charts, with intraday signals characterized as generally harder to handle.

Lookbacks restated as a parameter cluster

A parameter cluster is a short list of neighboring lookbacks drawn together so agreement among settings can be inspected. The restated lookbacks for the average-directional-index cluster lines are 3, 4, and 5. The restated lookbacks for both directional-indicator lines are 5, 8, and 14, not a third setting of 13.

ADX and directional-indicator lookback clusters

Read the directional-movement recipe as two short clusters rather than as one default length: ADX is plotted on 3, 4 and 5 periods, while both plus and minus directional indicators share 5, 8 and 14. Those six lookbacks are the figures BC Low restated in the January 2013 letters column, so they belong on the worksheet before any signal is read.
Read the directional-movement recipe as two short clusters rather than as one default length: ADX is plotted on 3, 4 and 5 periods, while both plus and minus directional indicators share 5, 8 and 14. Those six lookbacks are the figures BC Low restated in the January 2013 letters column, so they belong on the worksheet before any signal is read.

A reader had listed the directional-indicator lengths as 5, 8 and 13; Low corrected the longest of those lookbacks to 14. He also writes the three lines in separate end-of-day MetaStock windows and does not claim an intraday version.

Risk-reward ratio and strike rate

A reader asked what risk-reward ratio and strike rate are required for profitability when average winning-trade size is compared with average losing-trade size. A risk-reward ratio is a comparison of average or planned gain size with average or planned loss size, used to bound a trade before entry. Strike rate is the share of trades that must be winners for a stated risk-reward relationship to be profitable.

No archive item was identified that answered that profitability identity directly, though earlier money-management pieces were said to discuss how to calculate risk-reward ratios. The same reply stated there is not always a single optimal risk-reward ratio or a single exit strike rate that fits every case.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
21 of 27 in the Risk-reward ratio track
201437-37 pp.Next on Risk-reward ratioA three-step worksheet for VIX futures tick value and low-vol risk-rewardFutures-contract-selection uses a specific VIX expiry plus that listing’s session hours, 0.01 tick increment, and $10 multiplier instead of the informational cash index.
All readings on this track · 27 readings
  1. 1987Precommit the stop and require a surplus payoff
  2. 1987When open losses overwrite precommitted exit rules
  3. 1991Ranking month-end holds with risk-reward and stops
  4. 1994Evaluating percentage profit exits on trend-following averages
  5. 2001Construct reward to risk before entry
  6. 2003A pre-trade readiness checklist for entry, abstention, and risk
  7. 2003Evaluating out-of-the-money strikes with saddle premiums and implied volatility
  8. 2004A critique of one-procedure trading decisions
  9. 2004Mechanical stops leak intent and misprice losses
  10. 2004Implied-volatility premium on rate indexes
  11. 2006Keep the stop that authorized the entry
  12. 2006Bound the loss with a risk-to-reward filter before entry
  13. 2007Audit the operator before abandoning a system
  14. 2007Failed-break slingshot reversal rules
  15. 2007A system-management template that sets the stop and the required reward before entry
  16. 2007Construct a pre-trade style envelope for entries and skips
  17. 2008Systems that skip the three decision gates
  18. 2010Four-gate veto before trend entries
  19. 2012Construct a trading plan as one written procedure
  20. 2012Forex stops and reward targets by quote increment
  21. 2013The average directional index as a lookback cluster and a risk-reward bound
  22. 2014A three-step worksheet for VIX futures tick value and low-vol risk-reward
  23. 2014Binary option premia, fees, and pre-expiry risk-reward
  24. 2015Selling far out-of-the-money commodity option premium as a forgiving timing case
  25. 2016Prepaid option spreads that bound range-day risk and reward
  26. 2016Pre-trade risk-reward versus instinctive exits
  27. 2020Bounding a short-dated option spread with a stop, a gap remainder, and a credit exit
By fieldIndicators and filters874 readingsBy year2013169 readings
All 78 readings tagged Risk-reward ratio
Also on Risk-reward ratio5 readings
1987Precommit the stop and require a surplus payoff1987When open losses overwrite precommitted exit rules1991After a Wyckoff bias, rank leftover cause and keep three-to-one stops1991Ranking month-end holds with risk-reward and stops1992Filter size by expected value and ruin