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Before you open a position, it's a good idea to first determine the Risk to Reward.
- How long has it been since you were a child?
Risk Reward (RR) is the ratio between potential (loss) and potential (gain) in a trade. RR is an important tool in risk management and decision making.
RR is calculated by dividing the amount of risk taken by the amount of expected profit. (see image)
For example, if the risk in a trade is $100 and the expected profit target is $200, then the Risk Reward is 1:2. This means that the trader is willing to risk one unit for every two units of potential profit.
A good RR is usually between 1:2 and 1:3. However, the optimal ratio can vary depending on each trading strategy, but in my opinion the ideal RR is 1:3.
- What is the meaning of the word "soul" (Soul)?
๐ผ. Risk Reward Ratio can help traders manage their risks wisely and maximize potential profits in trading.
๐ฝ. Risk Reward Ratio can help traders choose trading opportunities that have a greater potential profit than the risk taken. By setting a positive Risk Reward Ratio, traders can focus on trades that provide a greater opportunity for profit compared to the risk taken. This helps traders in choosing trades that have a higher (probability) of generating profits in the long run.
๐พ. Risk Reward Ratio can help improve (discipline) traders in decision making. By having clear rules about the Risk Reward Ratio accepted, traders can avoid the temptation to enter trades too often with rewards that are not commensurate with the risks taken. This helps keep emotions in check and make decisions based on rational analysis.
๐ฟ. By monitoring and recording the Risk Reward Ratio of each trade, traders can evaluate and improve their trading strategies. Analyzing the Risk Reward Ratio of past trades can help traders identify profitable patterns or weaknesses in their strategy. This allows them to make the necessary adjustments and improvements to improve their trading consistency and results.
Overall, the goal of the Risk Reward Ratio is to help traders manage their risk well, select profitable trading opportunities, maintain discipline in decision making, and continuously improve their trading strategies. By using healthy Risk Reward Ratio principles, traders can increase their chances of success in the long run.
