Risk and reward

Summary

Before a trade, compare what you could lose (entry to stop) with what you could gain (entry to target). If you risk 1 to make 2, you can be wrong more often than right and still come out ahead over many trades. Ideas where the possible gain is smaller than the possible loss need a very high success rate to make sense.

Key points

• Compare the distance to the stop with the distance to the target.
• With 1 to 2, being right 40% of the time can still be enough.
• Small gain, big loss needs a very high success rate.

Check yourself

You risk 1 to make 2 on every trade. Roughly how often must you be right to break even?

Practice