The reward to risk ratio and why its important to us as traders. By Brijesh Patel

Happy Monday Everyone,
New Blog post by my boy Brijesh Patel, on twtr @brijesh0789
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The reward to risk ratio and why its important to us as traders.

In this article we'll go over what a set risk is and the benefits of having a set risk and using the ratio between it and the potential reward to determine if a trade is worth entering. So the first thing you need to do is determine how much tolerance you have for risk. There are many factors that go into figuring this out but an easy starting point is 1% of your account. It keeps your losses small and allows you to take several losses before they really affect your account. Let’s say you have a $20k account and your risk tolerance is 1%, you would risk about $200 dollars for every single trade you enter. This means that you would need to lose 100 trades in a row to blow your whole account, obviously you should reconsider your strategy before it ever gets anywhere near that bad.

The next part is the ratio between your reward and your risk. When you’re entering a trade you should look for strong levels of support and resistance and use them to figure out where your stop should go and where your “target” could be. I put target in quotations because I don't use hard targets these days so, for me, it's more of a gauge of possibility than a firm exit point. Once you’ve figured out where your stop and your target are you can figure out what the r/r is. To do that you multiply your position size by the distance from your entry which gives you your potential reward for the trade and then do the same for your risk. Ideally the reward should be much greater than your risk, if your reward is the same as or less than your risk you should stay away from the trade. I like my trades to have at least twice the potential reward as they do risk but the higher this ratio the better.

Now to explain why it's important to have a set risk and a minimum reward. Having a minimum reward ensures that when you win you win more than risk. So if your minimum r/r is 2 that it would take 2 losses to cancel out your wins and the higher r/r you use the more losses it would take to cancel out your wins. Using the same risk for every trade makes it harder to blow up your account because your wins hold more weight than your losses. If you’re inconsistent with your risk and have one bad trade it can easily wipe out all of your wins.