A Guide to Risk Reward Ratio (RRR) - How To Calculate and Setup

Hello Traders. Let me start off with a scenario that many - if not all has been through. Have you ever had a series of great trades, only to have one trade to burn your whole capital? It's probably everyone - and a guilty embarrassment that many do not want to admit. It's not bad - it's a learning process. I'm here to talk about how to effectively use stop losses. If you are not using stop losses - you are essentially gambling. You need to learn how to preserve your capital at best.

A stop loss is an absolutely vital tool allowing you to limit your losses when you are trying to increase your probabilities using technical analysis. In my opinion, calculated risk is never going to be 100% risk free; however, It is mandatory on every position if you want to keep your money safe (or safer, haha!). Using a stop loss is like an insurance policy. In case the trade is going wrong (which can most definitely happy), you can be sure that a large part of your capital will be safe (again, keyword being large).

Now, how do you place a stop loss? You are assuming that anyone can just use the stop loss tool and adjust the percentages and risk reward ratio to their likings, right? Wrong. You need to know how to place your stop via proper technical analysis, which is discussed below in a simple manner. Assuming you have a good probability set up, a stop loss allows you to sleep peacefully because a stop loss deletes the stress and allows you doing activities other than trading. You don’t need to monitor your trade every 10 minutes. The less you monitor your trade the less you risk to make mistakes.

Some people will say that stop loss decreases the winning ratio. This is also absolutely wrong. Again, it is ABSOLUTELY wrong. Many traders argue to get 90%-100% of winning trades.

How to place your stop loss:
Place your stop loss according to the market price level according to the suggested ratio of 2:1 as shown in the above diagram. Why 2:1? The RR ratio is the difference between the potential loss and the potential profit of your trade, according to your trade setup. You never want to take a trade if your risk/reward ratio is below 1. A RR of 2 and more is one of the key factors in order to become successful in trading. Imagine the insane performance it would be, if every trade you make had a RR of 2 with 80% of winning trades - that is phenomenal.

Also, I suggest that you never move your stop if the the trade goes wrong - I know many of you are also guilty of this. The only context allowing you moving your stop is if the market goes right in order to secure your profit (also known as, "moving up my stop loss in profit zones").

This is a part of the risk management series that I am creating. If interested, please check all of my great posts below!

Trade Safe.
X Force

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