Risk/reward ratio is a very important definition. Every trader must have this value set in his stock trading strategy. This simple formula is a little stock trading secret. It helps you to move trading probabilities in your favor.The profit value for every trade setup must be at least three times bigger than the risk value.
Simply put, if you expect to make a profit of $3 USD per share in a 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 trade only trades with the potential profit of $3 or more times bigger than the taken risk, your result will be stock trading with regular monthly income.
Later, as you develop a longer history of your real trades, you’ll be able to make small modifications of this ratio to value that best fit your trading strategy. Your trading journal or trade accounting software will provide you enough reports to do it.
It’s an easy to check if your trade setup fits with your risk/reward ratio. Simply use a spreadsheet with formulas.
Sumber : http://www.simple-stock-trading.com/riskrewardratio.html
