Risk and Reward Ratios in Trading

Risk and Reward Ratios in Trading
By Matt Kirk

One of the most important aspects of trading is your risk/reward ratio – when I explain this
in my seminars I see a light go on in traders heads immediately. Perhaps it’s such a simple
rule of thumb that people overlook it initially.

This exercise will show you that you don’t have to get it right all the time, in fact you don’t
have to get it right even half the time if you adhere to these guidelines when you trade.

Here are the rules –
1. Your losing trades on average are no more than 5% of your account balance  
2. Your profitable trades on average provide gains of 15% on your account balance

For example – on a $20,000 account the maximum risk is $1000 and the average profit is
$3000 per trade. Your trading system may call for stop losses to be trailed to lock in profit or
reduce the size of a loss. In this case the average loss may be $500 and if so then the
average profit may be $1500 which is still 1:3 risk/reward.

So, your losses on average are one third the size of your profits. Or to put it another way,
your profits on average are 3 times the size of your losses.

Let’s assume you have an account of $20,000 – now watch this…

Read more here: https://www.bsp-capital.com/documents/RiskRewardRatiosinTrading.pdf