Risk - Reward Ratio
In this article will learn about Risk : Reward Ratio on what it is and how to apply it.
Table of Contents
Reward : Risk Ratio
Using Fib Retracement as Risk : Reward Tool
There is a tool called Long Position and Short Position in the “Forecasting and Measurement tools” but that tool is not good than Fibonacci tool. Why ? cuz you don’t get more Targets at a time and cant set custom targets.
Lets us explore the R : R setting in Fibonacci will know why its good. Open Fibonacci tool settings and set values as shown in following image.
As you can see 0 is SL and 1 is Entry between 0 and 1 are .25, .5, .75 values to shift SL of T2 up when T1 is crossed also each Targets have mid values like 1.5, 2.5, 3.5, 4.5, 5.5 so when price reverse we can shift SL to any points as scenario plays out.
The following image shows how the settings look on chart.
As you can see for Long Position if entry is 200 and SL is 100 then according to SL it calculates all Targets. For e.g. Risk : Reward of 1 : 1 ratio you can see 100 : 100, 1 : 2 you get 100 : 200 till T5 (according to setting).
Also you can have Mid targets for trailing SL.
Below is a example of Long Position R : R for Entry 100 and SL is 0 you get all the target values.
Long Position Risk : Reward
Below is a example of Short Position R : R for Entry 100 and SL is 0 you get all the target values.
Short Position Risk : Reward
What R : R ratio to use ?
Entry Preconditions
Remember
- Price is in a setup area.
- We are fading weakness as price interacts with S/R or a swing H/L or
- fading weakness on a pullback within a trend.
- A stop has been identified.
- An area is identified beyond which price will NOT go, if our trade idea is valid.
- Ideally S/R or swing H/L.
- Targets have been identified.
- Next trading time-frame swing H/L or S/R.
- The entry zone is identified.
- Having considered LWP and LRP.
- Once all this is in place, it’s time to trade.
Fade the weakness!
Spring the Trap!
In the next article will learn on how to manage a trade.