Today we will learn about the concept of risk:reward in trading

Risk: is the maximum loss you can have

Reward: is the maximum profits you can get

Though it sounds very easy, most traders do not set the risk:reward before entering the trade

They get into the trade thinking they can dynamically vary the maximum profits or maximum losses, but it does not work.

That is because — our emotions will get in the way and cloud our judgment.

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In the above trade, if I go wrong the max loss will be 2105

And if I am right, the max win = 2895

risk:reward = 2105/2895 = 0.73

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Now, before taking this trade — my research should tell me that I am bullish on the market.

So if your research is right = you should win. If its wrong, you should lose. Simple merit-based model.

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If you can plan your next trades with this logic and set the max loss:max profits before entering the trade — you will be able to play this game endlessly. As you will never run out of capital.

If you do not set the same — you might either end up

1. holding onto losing trades more often

2. wipe out capital on 1 or 2 big trades