Risk:Reward

Risk:Reward is only important if you have the right Win Rate

Breakeven based on Risk:Reward and Win Rate
- 2:1 - 33% Win Rate (33 wins and 66 losses)
- 3:1 - 25% Win Rate (25 wins and 75 losses)
- 4:1 - 20% Win Rate (20 wins and 80 losses)
2:1 Risk:Reward - If you are risking $5, you are looking to see a return of $10+

Risk is what you are willing to lose (buffer before you consider that your entry was incorrect).
Remember, we want Big Wins, Small Losses.
Risk IS NOT how much you are putting into the market. Trading/Investing is not about risking until it is worthless (e.g. use $200 and ride it to zero). There are a few exceptions to this rule with option trading, but that is after you get comfortable with trading shares.
While we will look for trades that offer 2;1, 3:1, 4:1 ratios, or greater, the stock market does not care about your risk:reward or win rate. We are looking for great opportunities and understand that each trade may be a loss.
If a position does not represent at least a risk:reward>2:1 then you should avoid the position and move on to a more profitable setup. We are attempting to be patient and find the best setups with the highest probability of being successful.

Defining Your Risk

Entry

Depending on your strategy, your Entry is where you have decided to purchase shares
Below: Our entry is at the Fibonacci - 1 or $93.91

Stop

Stops are typically the low of the previous candle (you may want to go slightly below the low or at a momentum low )
Below: Our Stop is at Fibonacci - 0 or $89.69

Risk Per Share

Risk Per Trade vs Risk Per Share

Our Risk Per Share = Entry - Stop
Our Risk Per Trade/Risk Percentage is 1-2% of our Portfolio total value (Total value of the cash and stocks we currently own)
In order for us to be consistent in our losses

Risk Per Trade/Risk Percentage

Why 1-2%? The reason why we only select 1-2% per trade is because it gives us more opportunities to trade.
If we were to lose 1% a trade, we could trade 100 times before we run out of money (Assuming we lose every trade)
If we were to lose 2% per trade, we could trade 50 times before we run out of money (Assuming we lose every trade)
Some will say to risk up to 3% when you are just starting out because you have less funds to trade. Personally, I believe you should risk less when you are just beginning.
Example
- Portfolio = $1,000, Risk 1% = $1,000 x 1% = $10 Risk Per Trade
- Portfolio = $500, Risk 1% = $500 x 1% = $5 Risk Per Trade
- Portfolio = $1,000, Risk 2% = $1,000 x 2% = $20 Risk Per Trade

Shares to Purchase

Example: $1,000 Portfolio, 1% Risk Per Trade, Using the Chart Above's Entry ($93.91) and Stop ($89.69)
- $1,000 x 1% = $10 Risk Per Trade
- $93.91 (Entry) - $89.69 (Stop) = $4.22 Risk Per Share
- $10 / $4.22 = 2.369 or 2 Shares
- This enables us to be consistent in our losses and allows us to be profitable over time if we can consistently hit our Reward:Risk (e.g. 2:1 or 3:1) maintain the appropriate win ratio.

What is our Risk Per Share?

What is our Risk Per Trade/Risk Percentage?

Shares to Purchase

What is our Risk Per Share?

What is our Risk Per Trade/Risk Percentage?

Shares to Purchase

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