# 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 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. For information about ASYMMETRY® visit Shell Capital Management, LLC

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

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