The Risk to Reward ratio is another success key to successful trading. Before any discussion on Risk Reward Ratio I love to explain the normal trading technique which blindly following most of the beginners also experienced traders.
When beginners ready to trade at 09:15 am, they don’t know about their current capital value, the target of the day and a perfect StopLoss strategy. Traders love to enjoy the trading time experience, but they exit from the market without any actual experience.
When a day you got profit luck by chance, I bet you, you going to try to do the same with your whole capital by the next day. As the final result, you become out of the market!
Risk Reward Ratio helps you to become a profitable trader. Let’s learn it
What Is Risk To Reward Ratio ?
I know the value of time, no matter it’s your or mine! So, go simple.
Do you setup StopLoss and Target on your selected script while trading? If yes, then it’s will be too simple.
Your StopLoss is the Risk and Your Target is the Reward.
How To Calculate Risk Reward Ratio?
Risk To Reward Ratio = Risk : Reward = Risk/Reward
N: B – Risk Reward Ratio should be less than one ( <1 ) for a professional trading.
Risk Reward Ratio: Why Important?
Now I am going to explain why you need to obey the risk reward ratio rule.
When you are a beginner, when you trade based on probabilities, when you do not have a Guru, the risk reward ratio protect you from overall loss.
My Experiment: Once a day I randomly bought 10 different shares with the same quantities ( Qty=10 ) and applied 1:2 Risk Reward Ratio ( StopLoss=5 points and Target= 10 points ).
Also randomly sell 10 different shares with the same technique and shut down the system.
Result Of Experiment: After closed the market, when I have checked the position tab, there were 14 scripts target to hit and only 6 scripts were hit the stop loss.
I tried the same things over week & week. Somedays the situation was different ( Target hit only 8 and SL hit 12 times ), but 1:2 Risk Reward ratio protect me from loss.
When you have a basic knowledge about Candlestick Patterns, Chart, and Indicators, that time you know where the market will be gone. So, in that case, your target hit probability is much higher. Now just punch 1:2 or 1:3 risk reward ratio with your knowledge and experience. I bet your loss amount can’t beat your profit!