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Risk vs Reward: A Very Critical Metric

While learning to trade you must have heard about this important ratio called ‘RISK VS REWARD RATIO’

What exactly is a risk to reward and why is it so important to learn about this if u want to not only survive but also to earn good money from the stock market that is something we will talk about today

 

Risk vs Reward ratio:

If you truly want to learn to trade and earn money in stock u should understand a fact that stock market is the game of ‘probability’.  As there is nothing as 100% in stock market.

So there is always a risk that is involved in your trading and the person who manages this risk is the one who can earn money

So coming to our topic risk to reward ratio means the amount of risk you are willing to take for the amount of reward you desire to take

For example: if i want to buy reliance at 2000

And i keep my stoploss at 1990 (10 pts risk)

And my target till 2020(20 pts reward)

So in this example I’m willing to take a 10 pts risk for a 20pts reward

Which also take us to the formula

i.e risk to reward ratio= risk/reward= 10/20 = ½

bonus tip: while trading keep your risk to reward atleast  1/1.5, 1/2 or more

 

 

Win percentage with risk to reward:

Win percentage is the calculation of how many trades were successful/profitable out of the total no. of trade you took

For example: if u take 10 trade and out of 10, 5 were winning trade and 5 were losing trades then your win percentage is 50%

A lot of people think that having a high win percentage is the only way to be profitable and successful in the stock market

Let me tell u frankly that it is not true,

It is not like that just by having a 70%+ win percentage will make u successful trader and a 40-50% will not

Let me tell you an amazing fact that even a 40% win percentage guy could beat a 70% if his trading system is good

Let us take an example of how risk to reward can make you a profitable trader

With just by simple maths you can understand how important risk to reward just like win%

Below we have 3 different traders with three different win % and different risk to reward strategy

 

Trader Win % Risk to reward 1st trade 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Total win Total loss End p/l
A 70% 2:1 +1 +1 +1 +1 +1 +1 +1 -1 -1 -1 7 3(2)=6 +1
B 50% 1:1 +1 +1 +1 +1 +1 -1 -1 -1 -1 -1 5 5 0(brokerage charge so negative)
C 40% 1:2 +1 +1 +1 +1 -1 -1 -1 -1 -1 -1 4(2)=8 6 +2

So see even at the end of the day person with 40% can be profitable we he follow a the below factors strictly

  • Never let your loss exceed the beyond the point you have decided
  • Show trust in your trades, be patience in your winning trade and achieve your target

EXAMPLE :

Let see with some example how you keep your SL and target, maintain risk to reward, and how you need to improvise in a real market scenario

1)Indusind bank ltd . 28th April 2021

risk-vs-reward-a-very-critical-metric
Risk vs Reward: A Very Critical Metric

-Simple price action analysis for indusind bank,

It gave a huge gap on 12th April and It was not filled till now

Yesterday price reached this key resistance around @884 and market was closed

Today price opened above this resistance and volumes were strong,

All we need a good entry ptn

risk-vs-reward-a-very-critical-metric
Risk vs Reward: A Very Critical Metric

Price started going up with huge volume

But we have to wait for a retest, I was expecting  a retest till our previous resistance @870 which should become a support now but stockt was too bullish

So we got retest only till R2 and LPR(lower price rejection) from there and that was our entry signal @897

Now SL Below R2 around @891

Now usually you take the whole gap as target if it not too big for intraday

So price rejection from 910 was our exit signal and to book profts

Risk to reward: 2.1

Price started going up with huge volume

But we have to wait for a retest, I was expecting  a retest till our previous resistance @870 which should become a support now but stockt was too bullish

So we got retest only till R2 and LPR(lower price rejection) from there and that was our entry signal @897

Now SL Below R2 around @891

Now usually you take the whole gap as target if it not too big for intraday

So price rejection from 910 was our exit signal and to book profts

Risk to reward: 2.1

2)Mahindra and Mahindra

risk-vs-reward-a-very-critical-metric
Risk vs Reward: A Very Critical Metric

Let me give you another example of few days back analysis

Another simple price action trade

On 23th April M_M breakdown a very importance support lvl @785 with strong volume

After breakdown there was a small consolidation as a retest , later closing below the pivot ptn S2 was our entry signal

Keeping the SL above the breakdown [email protected]

risk-vs-reward-a-very-critical-metric
Risk vs Reward: A Very Critical Metric

exit around 774 after seeing the huge green candle

Risk to reward: 2.92/1

extra tips:

  • Your stoploss should always be logical i.e above or below a valid resistance or support and not on basis of how much u want u can risk

So decide your position size according to your SL, not your SL for how much of position you want

  • If you can get more assurance just by adding few more little pts to your SL like adjusting your SL little more below so u can get extra pivot ptn support or any ema or ma support , vwap etc you should take it
  • Take entry only at your favourable price i.e be discipline and wait for your price, also if wait too much for confirmation your risk to reward will suffer

Moral if you don’t  get entry at your price leave the opportunity, new one will always come

  • If you want to earn big you have to be patient and let your winning traders and exit only after proper confirmation

 

Money Making Trading Course (MMTC) by Tushar Ghone and Amruta Ghone is committed to providing an Advance level Technical Analysis course with 50hrs training at a nominal price. Our main aim is to enhance student’s financial knowledge and teach them profitable trading strategies. We also provide training for the next 6months along with daily Equity and options Analysis on our telegram Channel. https://telegram.me/MMTC123

We at Tstock Mantra Investments by Amruta Tushar Ghone provide complete Financial Planning for an individual i.e., Mutual Funds, Insurance planning, Retirement planning, and so on.

For more information about trading and stock market visit our blog page.

 

 

2 thoughts on “Risk vs Reward: A Very Critical Metric”

  1. Pardeep Kumar Dhiman

    Very advance information provided by you through this brief explanation, Sir….
    Thanks a lot Sir Ji….

    1. virang zaveri

      Thank you for your appreciation post Pardeep ji. Also, all the very best for your investing/trading journey.

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