Asymmetric reward-to-risk set up

What is an asymmetric reward-to-risk set up?

Asymmetric reward-to-risk set up is a market position entry that has a positive expected asymmetric reward-to-risk ratio at the time the position is entered.  An asymmetric reward-to-risk set up is designed by predefining the initial risk and estimating the expected possible profit.

In the idealized example of an asymmetric reward-to-risk set up below, the current market price is $50, the predefined exit is $45, so the initial risk is $5, or a 10% decline. The idealized estimated profit potential is $60, which isn’t a prediction, but an estimate of how far the investor/trader estimates the trend could potentially move. This example has positive ASYMMETRY®, which is a positive expected asymmetric reward-to-risk ratio of 2:1. Initial risk is $5, potential profit/reward is $10, so the positive expected asymmetric reward-to-risk ratio is 2:1 and the ASYMMETRY® ratio is 2.


Asymmetric reward-to-risk set up

Asymmetric reward-to-risk set up in a real-world example using a simple trend following indicator like the 200-day moving average is another way to explain it.

A very simple example of how we take a risk applying an asymmetric reward-to-risk set up. I decide I am willing to risk losing some % of my equity to see if a trend will play out. If I were using a simple trend following indicator like the moving average I would predefine the text to cut a loss short – that is my risk. In the hypothetical example below the exit and size is at the 200 day MA is at $253, or $9 below the current price. That’s $9 of risk in the position. The profit potential could be a discretionary estimation of how high we believe the price could trend up, or it could be based on a trading system. To risk $9 in this position only allows it to decline -3% before it sold,  so the risk control is tight in this example. Suppose the tactical trader believes the position may trend up to at least the new high at $289, that is a $27 gain on a $9 risk., which is an asymmetrical reward to risk. A $27 profit on $9 of initial at risk is 3:1 asymmetrical reward to risk ratio if the position reaches its prior high again.


asymmetric reward to risk set up ratio asymmetry

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ASYMMETRY®, ASYMMETRY Investment Program®, and ASYMMETRY Capital Partners® are registered trademarks of Shell Capital Management, LLC.

For more information, see:

Asymmetric Payoff

Asymmetric Investing

Asymmetric Risk

Seeking Asymmetric Returns

Asymmetric Trading System

Asymmetric Return Distribution

Asymmetry Ratio

Absolute Return

Positive Asymmetry

Asymmetric Beta

Asymmetric Risk Management