Are you using risk reward ratio (RRR) in your trades? If yes, well and good. If not yet, then you should, as it helps you improve your decision making in your trades, thereby improving your trades over time. With better trades, we’ll have better trade expectancy on the way to a profitable portfolio.
Risk reward ratio simple measures the potential risks (losses) versus the potential rewards (gains), and whether one outweighs the other and by how much. Ideally, we enter trades where gains outweigh the losses by at least 2:1. Meaning the RRR should be 2 or higher. The higher the RRR, the better, but it must remain realistic (in terms of target price) and it’s just a tool for decision making and setting stop losses.
Although this is just based on target price and stop losses (and real price action will be different), at least we have a view of how the risks are stacked against us (whether low, 1:1 or high), even before we enter the trade.
In this video, we discussed RRR in detail and showed how to plot it. Enjoy!