Discover Your Next Trading Step w/ this Test >>

Listen to “Risk-Reward Ratio in Trading” on Spreaker.

Hi, Andrea Unger here. And some seconds to discuss risk-reward.

Risk reward 1:3.

Is this the Holy Grail of trading? Sometimes, you will read about that, but I believe it’s not. Actually, it is not. Believe me, the risk-reward depends on the kind, the type of strategy that you put in place. There are strategies where you might even have a reward which is smaller than the risk. I have plenty of them. Maybe at a stop loss of $1000, at a take profit of $500. So, am I crazy? No. The point is these strategies have a winning percentage which is much higher than 50%. It’s not like a coin toss. it’s something where I maybe have 10 winners and one loser. So, with 10 winners of 500, I get $5000 and a loser of $1000—still leaves me with 4000 in my pockets.

So, actually, it much depends on the kind of strategy. If you use a classical trend following strategy or you go for a long-term trend, normally, in this strategy, you don’t even use a take profit because it would cut your runs. It would be counter-sense.

So actually, in these strategies, the reward is much, much wider than the risk. But you also know if you use them that you are stopped out very often, false breakout, trends that don’t start. So, you enter many times, you get many small stops. And when you get, at last, the desired winner, you get a big win. It means you have a large risk reward.

But if you use countertrend strategies, rebound strategies—things like that—swing trading strategies, sometimes you use take-profits which are smaller than the stop loss that you put in place, just because you want to catch a small and fast rebound and you leave breathe to the trade if it goes against you just because you are still waiting for that moment when the move changes direction.

So, actually, risk-reward 1 to 3 is a legend that is probably told from people who never clicked on a mouse to catch the trade. Believe me, it depends on the kind of approach that you put in place.
Stay tuned.

Discover Your Next Trading Step w/ this Test >>

What do you think about this post? Don’t forget to share your thoughts in the comments below!

And if you think the content is valuable, feel free to share it with your friends! 🙂