Risk reward ratio

Risk reward ratio is very important definition. Every trader must have this value set in his stock trading strategy This simple formula is little stock trading secret. It helps you to move probabilities of trading to your favor.

Profit value for every trade setup must be at least three times bigger then risk value.

Simply: if you expect to make profit 3 USD per share in trade, you have to risk 1 USD per share as maximum.

This trading secret looks easy but a lot of traders break this rule and then their trading results are bad.

When you will trade only trades with potential of profit 3 or more times bigger then taken risk, your result will be stock trading with regular monthly income.

Later as you will have longer history of your real trades, you will be able to make small modifications of this ratio to value which best fit to your trading strategy. Your trading journal or trade accounting software will provide to you enough reports to do it.

There is easy to check if your trade setup fit with your risk:reward ratio. Simply use some spreadsheet with formulas.

My special stock market trading tip

Do not afraid to reject trade setup even you like it very much.
There are plenty of another trade opportunities. Every day you will be able to find good stock pick on stock market.

Return from Risk reward ratio back to Stock trading system