Now, you don’t want to place a stop loss at an arbitrary level (like 100, 200, or 300 pips). How to set a proper stop loss and define your risk The most important metric in your trading is not your risk reward ratio or winning rate. There’s no such thing as… “a minimum of 1 to 2 risk reward ratio”.īecause you can have a 1 to 0.5 risk reward ratio, but if your win rate is high enough… you’ll still be profitable in the long run. This means your trading strategy will return 35 cents for every dollar traded over the long term. In this example, the expectancy of your trading strategy is 35% (a positive expectancy). Next, apply these figures to the expectancy formula:Į= x 0.6 – 1 = 0.35 or 35%. If your 4 losers were $1,600, then your average loss is $1,600/4 = $400. If your 6 winners brought you a profit of $3,000, then your average win is $3,000/6 = $500. This means your percentage win ratio is 6/10 or 60%. 6 were winning trades and 4 were losing trades. The secret to finding your edge (hint: the risk-reward ratio isn’t enough) Instead, you must combine your risk-reward ratio with your winning rate to know whether you’ll make money in the long run (otherwise known as your expectancy). So out of 10 trades, you have 8 losing trades and 2 winners.īy now I hope you understand the risk reward ratio by itself is a meaningless metric. Let’s say you have a risk reward ratio of 1:2 (for every trade you win, you make $2). “You need a minimum of 1:2 risk reward ratio.”īecause the risk-reward ratio is meaningless on its own. Now, here’s the biggest lie you’ve been told about the risk reward ratio If you have a risk-reward ratio of 1:5, it means you’re risking $1 to potentially make $5. If you have a risk-reward ratio of 1:3, it means you’re risking $1 to potentially make $3. The risk-reward ratio (or risk return ratio) measures how much your potential reward (or return) is, for every dollar you risk. Then let’s begin… What is risk-reward ratio - and the biggest lie you’ve been told Here’s what you must do…Īnd after reading this guide, you’ll never see the risk-reward ratio the same way again. Your risk-reward ratio doesn’t give you an edge.How to analyze your risk-reward ratio like a pro.How to set a proper target and define your reward.How to set a proper stop loss and define your risk.The secret to finding your edge (hint: risk-reward ratio isn’t enough).What is risk-reward ratio - and the biggest lie you’ve been told.In this post, I’ll give you the complete picture so you’ll understand how to use the risk-reward ratio (aka risk return ratio) the correct way. You can look for trades with a risk-reward ratio of less than 1 and remain consistently profitable.īecause the risk-reward ratio is only part of the equation. You can look for trades with a risk reward ratio of 1:2 and remain a consistent loser (and I’ll prove it to you later). Don’t be fooled by the risk reward ratio - it’s not what you think.
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