What Is Asymmetric Trading?

Asymmetric trading is when the potential profit of a trade is higher than the potential loss. We can see if a trade is asymmetric by calculating the risk:reward of an opportunity.

What Is Asymmetric Trading?

Any opportunity where the risk:reward is higher than 1:1 will be an asymmetric opportunity. In the example we have a risk reward of 1:3. For every $1 we have at risk, the potential return is $3. This would be an asymmetric situation.

One reason for focusing on asymmetric opportunities is that your success rate doesn't need to be particularly high to be profitable. In fact, most of your trades can be losses while still being profitable.

The following table shows what risk reward is needed to break even - although transaction costs would put it slightly negative.

That means if you have a 1:4 risk:reward ratio, as long as your success rate is higher than 20% over the long-term, you’re a profitable trader. 

You’ll notice I also included the success rates needed to breakeven. That’s because we also need an edge in the market to increase the probabilities and make the opportunity worth taking. If we don’t know the probabilities, then we won’t know if the opportunity will be profitable overall.

The Negative Side of Asymmetric Trading

There is a downside to asymmetric trading, most of your trades will end up as losing trades. Taking lots of losses can be a tough pill to swallow, and can feel like the market is working against you. 

Let’s say you take trades with a 1:4 risk reward. If you have a 30% success rate, then you’ll be profitable overall. But you’ll still be losing 75 out of every 100 trades you take. Having so many losses can result in stress, panic, and even doubts about the approach. 

It may be counterintuitive, but you’re almost expecting each trade you open to be a losing trade. Knowing your probabilities will help overcome these issues when trading asymmetric opportunities.