Profit Loss Ratios – How Much Would You Risk For a Profit? What Percentage Of the Time Must You Be Right?

How Much Would You Risk?

Risk/Reward

How much are you comfortable investing for a profit? How much is acceptable for a loss? These are very important questions to consider before embarking on a trading strategy. If you are happy risking 1 to make 3, then you only need to be correct 25% of the time to break even in your trading (not too shabby!) If you risk $50 to make 1 dollar then you need to be correct 98% of the time! If you risk $100 to make $100, you need to be correct 50% of the time to break even. For example, starting on the left side of the table (green) you you enter a trade that you invested $300 and you think you could make $900 profit from that trade, your max loss is $300 (the 1 in the table), your max profit is $900 (the 3 in the table). The 25% on the right red portion of the table means you could take these types of trade all year round, and you only have to be right 1 out of 4 times in order to break even. Of course to make a profit (and not just break even) it helps to be right more often. And it’s not always easy to find these types of trades. In the example above, you can also set stops in your trades that capture just 25% or 50% of your max profit potential so you don’t lose out hoping things will go your way longer than necessary. This helps increase the probability of you being correct, (but lowers your profits.) For Further Reading on profit / loss ratios, check out Investopedia.

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