[snip]
STEP 1: Understanding Risk to Reward Ratio
Risk to Reward Ratio is the most solid strategy provided by Risk Management Theory. It is called Risk to Reward but actually is Reward to Risk Ratio It basically is a ration which is developed by this formula
Profit you can earn per trade(Difference from Target to Entry)
_________________________________________________
Risk you take per trade (Difference from Stop Loss to Entry)
This means for example if you take a trade at $10000 and your pattern says a target of $10200 and stop loss at $9900. Now feeding in the values in formula:
$10200-$10000 $200 2
____________ = __________ = _ = 2:1
$10000-$9900 $100 1
Well, this is a good explaination OP and I like this number 1 risk management.
Risking money is hard to speculate but at least you know that anytime what will happen you are risking that you can afford.
Actually, In essence, in order to calculate the risk-reward ratio you only need three components:
1] Entry Price
2] Stop Loss
3] Take Profit
Try to refer to my source for further knowledge and I think the 3 basics are quite a lack of information.
Source:
https://tradingstrategyguides.com/trading-risk-management-strategy/Very well said. I tried to concise the information so it doesn't becomes boring. There are books written on merely risk Management. If anyone wants to read those books here are name of some
1. A Trader's Money Management System - by Bennett A. McDowell
2. Market Wizards- By Jack D. Schwager
3. How to Day Trade for a Living - Andrew Aziz
Newbie traders losing when they try too many things which still they are not familiar yet,which could be related to don't risk everything in one day.We have to learn the things and find which will suit for us,until that keep the trade capital as negligible value from the total capital even $100 can teach lot things than learning from other.
This can be a good idea to test your strategies. Some people say that they should do paper trading but even trading with a very small capital gives you touch of real money and something which won't burn if you lose it completely.