What did we say? Trading without risk management is like driving without a seat belt.
Risk management is the process by which investors evaluate various factors, make predictions, and rate risks. Risk management is applied to calculate profit and loss, avoid dice and develop strategies for maximizing profits. Risks can be managed in the following key steps:
► Identification of risk
First, the risks that investors may face need to be identified. In order to identify the risks, the investor needs to evaluate each risk separately.
► Measuring risk
Measuring risks is a method used to measure how big the risks that the investor may face will be. Investors use financial indicators and analytics to gauge how big the potential risks will be.
► Calculation of Risk/Reward Ratio
The risk reward ratio is calculated by dividing the return on the investment instrument by the average market return corresponding to a given degree of risk.
► Position sizing
In order to limit the investor’s risk, the appropriate position size is selected for each asset. Position size can be determined by dividing the total portfolio according to the risk level of the assets, investment strategy and prospects.
In this post, we will explain how to calculate the Risk Reward Ratio (R/R ratio for short). How much risk do you take in relation to the possible return in your positions? What is the ratio of your probable gain to your probable loss? So what is your preferred risk/reward ratio?
For those of you who don’t know, this calculation is pretty simple to do. We do not need to do complex operations with such a calculator. All it takes is a NewsOfFinance drawing tool ✨
First, we do our technical analysis. Our expectation is as follows:
We determine our target point, entry and stop points suitable for the analysis. We do this using the Buy Position tool.
As you can see, after adjusting the inputs of the drawing tool according to the point determined by the analysis, the tool calculates and displays the R/R ratio for us. In this example, we captured a position with a Risk/Reward ratio of 10.07. So how exactly did he calculate this ratio?
According to our analysis, our profit target is 71.50%, while our stop level is 7.10%. So max profit/max loss = 71.50/7.10 = 10.07. So if we assume that we have a $1000 position, we risk losing $71 for the profit potential of $715. Is it worth a try?
Another example. We decided to buy at $5, thinking that NewsOfFinance’s share price would go up to $20. We buy 200 lots at $5, we have a total position of $1000. Our stop level is 3 dollars, our maximum loss is 400 dollars, our maximum profit is 3000 dollars. What is our R/R ratio here? Let’s see you in the comments 👀
We hope you understand the rationale for the Risk/Reward Ratio a little more deeply, and we look forward to seeing how you use it in the ideas you publish.
Thank you for reading!
Best regards, NewsOfFinance Team 💖