Risk To Reward Ratio Needs To Be Maintained On All The Trades
The thought of trading for income tempts all but very few believe that it is actually possible. Well, why is that so?
This is because they think that how is it possible to be profitable in all the trades? The market is volatile and there can be unexpected swings at any time. So how can you be prepared for these swings and make sure that you are always in the green?
To trade for an income you need to be profitable in every trade and make sure that there is no trade that ends in a loss, right? No, this is absolutely wrong
The successful traders have a different story here
The professional traders who actually trade for a living will tell you that most of their trades end in the red. So how do they still manage to make regular income trading?
This is because they have a risk to reward ratio on each trade that they take.
What is a risk to reward ratio?
The risk to reward ratio, as the name suggests is the amount of risk that you are ready to take for the reward that you expect to make each trade. Would you be ready to say take a risk of 100 for a reward of 50? Highly unlikely! But would you be ready to do the other way around? Like, take a risk of 50 for a reward of 100. Most probably yes!
For every trade that you take, you should ensure at least a reward: risk ratio of 2:1 or higher. It is better if it is higher because it gives you more room.
If you are an intraday trader then ensure that you at least have a 2:1 reward to risk ratio on each trade. A positional trader should aim for a 3:1 reward to risk ratio on every trade.
How does this help?
If you maintain this reward to risk ratio say of 2:1 then if you just have one profitable trade and two loss trades you still are even. With a higher reward to risk ratio on each trade, you are ok to take more losing trades than profitable trades and still not lose your capital.
So you understand how the professional trades, even with a higher number of loss-making trades, still and green?
Honor the reward to risk ratio on each trade and you should never take a trade that is less than 2:1 reward to risk ratio. This should be apart of your trade plan as well.