Reward-to-risk ratio. It is quite possible that you have heard this term a lot but you never really bother to probe it. After all its explanation is all in the name, right?
But the thing is that for your own purposes you are going to have to set your priorities and your own reward-to-risk ratio.
Yes, yes. Think about it like about a part of your trading plan. You are going to set a goal and you are going to do everything that is in your power to reach this level.
One of the best ratio there is, is 1:3 reward-risk ratio.
What does that mean?
That means that for every $100 lost you need to earn $300. And the higher the numbers are going the better the system is going to work.
Of course with that you are probably thinking – well, then I better set a very high ratio. I will earn more then.
No-no. that is quite a common mistake if I say so. Here is where higher and bigger does not necessarily mean better. After all we are not talking about pizza or a cake. We are talking about you risking your own hard-earned money.
The more you lose, the more you are going to have to risk to indulge your ratio. And as we all know there is no sure guarantee that you are going to win.
Ahh.. if only there was such a guarantee.