TradeCityPro Academy | Risk to Reward👋 Welcome to TradeCityPro Channel!
Let’s dive into another educational segment. After discussing capital management and risk management, we now turn to one of the most crucial concepts before entering technical analysis: Risk to Reward!
📌 Understanding Risk-to-Reward in Real Life
Before we start, let me give you an example of risk to reward from the real world, outside of financial markets. Imagine you are considering investing in a startup technology company that has launched a new product.
Risk: You estimate that you might lose $500 of your investment due to uncertainty about the product's success and intense market competition.
Reward: However, if the product succeeds and the company grows, you could make a profit of up to $2000.
In this example, the risk-to-reward ratio is 1:4, meaning for every $1 at risk, you could earn $4 in reward. This ratio can help you decide if this investment is appealing. If you believe the risk is acceptable and the potential reward is valuable, you might choose to invest.
⚠️ The Reality of Risk-to-Reward in Trading
In the real world, if you are a logical person, we all adhere to risk to reward principles. However, it’s puzzling how, in financial markets, you often close your profitable trades as quickly as possible while staying in losing trades for months. This indicates a failure to adhere to risk to reward principles.
Before I explain risk management and related concepts, make sure you've viewed the previous sections on risk management and capital management. Remember, if you're not setting stop-loss orders, this lesson might not be very useful for you.
🔍 What is Risk-to-Reward in Trading?
In financial markets, risk to reward refers to the ratio between the level of risk an investor takes with a specific investment and the potential reward from that investment. This concept helps investors evaluate whether a particular investment is worth the risk.
When trading, if you are about to open a position, set a stop-loss. If your stop-loss is triggered, resulting in a $10 loss, your target profit should be at least $20, creating a risk to reward ratio of 2. I won’t open a position with less than this!
It's important to note that risk to reward alone doesn't hold much meaning. It gains significance when considered alongside win rate. The chart I will share clarifies the relationship between win rate and risk to reward.
Look at the chart below. If your risk to reward is 1 and your win rate is 50%, you are breaking even—neither gaining nor losing. For risk to reward ratios below 1, you need a win rate of 100% to break even. Our logical risk to reward ratio is 2, where a 40% win rate keeps you profitable. We should allow our minds room for error rather than always striving for accuracy.
🛠️ Understanding Trading Tools
Let’s take a simple look at our tools. The chart showcases two types of tools: short position and long position, applicable for both falling and rising markets. The tool displays your risk to reward ratio in the middle, with the stop-loss percentage below and the profit percentage above for long positions, and vice versa for short positions.
📈 Why Should You Use a Risk-to-Reward of 2?
Why do you implement a risk to reward of 2? Consider this: if I opened 10 positions this week, with 6 hitting stop-loss and 4 reaching targets, my total loss would be $60. However, due to adhering to a risk to reward ratio of 2, my total profit would be $80, resulting in a net gain of $20!
This illustrates the importance of adhering to risk to reward principles. Even if we lose more trades than we win, we can still be profitable in the end. The key is to focus on the overall outcome rather than individual battles.
❌ What Happens If You Don’t Maintain a Standard Risk-to-Reward?
Now, consider what happens if I don’t maintain a standard risk to reward. For instance, if I open a position with a risk to reward ratio of 0.5, even if I make a profit, a subsequent loss could negate that gain.
If you are involved in financial spaces, you may have encountered signal channels that share their positions, encouraging you to follow for profitable outcomes. For example, if they claim to profit from 95 out of 100 positions, you might feel that winning sensation. But what is their risk to reward ratio? A ratio of 0.1 means that if they hit just a few stop-losses, you could end up in a loss.
Be cautious of misleading advertisements and high-return claims. If you manage to achieve a 5% to 10% profit monthly and sustain it for a year, even starting with $100, your trading record will be respected, leading to more funding opportunities. Avoid falling into traps set by opportunistic individuals.
🚀 Practical Trading Considerations
Consider this: if you want to open a position but your target is above a major resistance level, and the likelihood of reaching it seems slim, I personally prefer not to open that position. It indicates that my entry point may not be optimal.
❤️ Friendly Note
In closing, I encourage you to keep your positions until you reach your risk to reward target. Avoid checking the chart until you hit that point. Set alerts and make decisions only then. Always adhere to these rules for all your positions, not just one. Don’t worry about losing out on profits; instead, approach trading with calmness.
Finally, remember that a profit in a position is not truly realized until it is closed and transformed into something tangible—food, clothing, a house, or a car.
Risktoreward
A Trading Plan MUST Include A Sound Risk Management StrategyOne of the biggest mistakes a trader can make is to neglect the aspect of risk management. In this video, I divulge the most pivotal lesson I’ve gleaned from my experience in trading. During the initial years of my trading journey, I disregarded the importance of risk management, which proved to be detrimental in a significant way. The watershed moment of my trading career came after incurring substantial financial losses. This experience was a stark revelation of the imperative nature of a robust risk management strategy for trading success. It was an excruciatingly costly lesson. Should you have bypassed dedicating time to understand risk management, you might be on the brink of a potential calamity. By watching this video, I hope you can sidestep the blunder I once made in the nascent stage of my trading endeavors.
10 EMA strategy ^BEST TREND-FOLLOWING STRATEGY^Welcome! Today, I'm excited to share with you one of the most effective trend-following strategies that is adaptable to any timeframe and asset class ( OANDA:XAUUSD , NSE:NIFTY , FX:USDCHF ), boasting a remarkable risk/reward ratio of up to 1:10. Let's dive right in.
As mentioned, this strategy revolves around the Exponential Moving Average (EMA), specifically the 10-period EMA. For those unfamiliar, the EMA places greater emphasis on recent price data compared to a Simple Moving Average (SMA), providing a dynamic view of market trends.
When the price on your chart is above the 10 EMA, it signifies a bullish trend; conversely, when the 10 EMA is above the price, it indicates a bearish trend. Let's illustrate with an example:
Imagine a bullish trend with four consecutive green candles followed by a red candle. Our entry point occurs when this red candle, the trigger candle, fails to touch the 10 EMA. Subsequently, when a green candle crosses above the high of the trigger candle, we enter the trade. Setting our stop loss (SL) just below the EMA line beneath the trigger candle, we establish our take profit (TP) based on a risk/reward ratio, starting at 1:2 and potentially reaching an impressive 1:10.
Trailing the 10 EMA line allows us to stay in the trade longer, albeit experiencing initial stop-loss hits. However, perseverance reveals the strategy's efficacy over time.
Now, for short positions, such as during a downtrend characterized by three red candles followed by a green candle, our entry occurs when the low of the green candle is breached by the subsequent red candle. Setting the SL just above the EMA line above the trigger candle and TP based on the risk/reward ratio, we execute the trade.
For those interested in trailing stops, there are two options: firstly, trailing along the 10 EMA line; secondly, utilizing the Average True Range (ATR) for algorithmic trading enthusiasts.
With this strategy's flexibility and potential for significant returns, it offers traders a robust approach to navigating diverse market conditions.
***Here are 2 examples of Long & Short: Long position in BINANCE:SOLUSDT
www.tradingview.com
Short in FOREXCOM:EURCAD
It's crucial not only to grasp the concept of this strategy but also to put it into practice. 💼 Start by implementing it with small capital or utilize paper trading, which platforms like TradingView offer. 📝 Additionally, don't hesitate to experiment. For instance, try using an 11-period EMA and assess its effectiveness. You might find that it better suits your trading style and objectives. 🧪💡 Remember, trading is a journey of discovery! 🚀 Don't be afraid to explore new strategies and techniques along the way.
🌟 Like (boost), follow, comment, and share this strategy to spread the knowledge and empower fellow traders! 📈🚀👍
For the optimal TradingView experience, upgrade now to unlock the platform's full potential:
www.tradingview.com
My Trading Strategy in 3 Steps 📊As per @TradingView 's previous post, in this article, I am going to share my trading strategy in three steps.
📌 Step 1:
First, start from the higher timeframes like Daily/Weekly to identify the current long-term trend. Is it bullish, bearish, or stuck inside a range?
If the price is sitting in the middle of nowhere, then it is a NO trade zone, as the price has a 50% chance to go either up or down. Thus, there's no edge!
Remember: No trade is also a trade.
📚Wait for the price to approach the lower bound or upper bound. Then proceed to Step 2.
📌Step 2:
Zoom in to lower timeframes like H1 and M30 to look for any reversal setups.
A basic approach would be to wait for a swing low to be broken downward around a resistance as a signal that the bears are taking over.
In parallel, wait for a swing high to be broken upward around a support for the bulls to take over.
This would be the confirmation to enter the trade.
Just like a sniper waiting for the perfect shot!
📌Step 3:
Target at least a 1/2 risk-to-reward ratio. This way, even with a 50% win rate, you can still be profitable.
Remember: We are risk managers, not traders. We can't control the market; the only thing we have control over is our risk.
📚Always follow your trading plan regarding entry, risk management, and trade management.
Hope you find the content of this post useful 🙏
All strategies are good; if managed properly!
~Richard Nasr
Think Before You Short: AMZN EarningsTraders need to check weekly charts when considering selling short stocks at this time. Many times there are strong support levels close to the current sold down price action.
The weekly charts also provide more data for day and swing traders to determine the all important RUN GAIN POTENTIAL. This must be calculated before any trade to determine the Risk versus Profit Potential for that trade, regardless of whether the hold time is a few minutes or several days for swing trading.
For many stocks, the recent selling down is not due to weaker earnings expectations but due to an overall reaction to retail news regarding international conflicts, US government uncertainties and regional wars.
The key element for trading stocks short-term is to understand where support will kick in and halt a sell short trade. Understanding the functionality and the strength or weakness of a support level is crucial to attaining a high-profit trade.
It is also a factor if you are waiting on the Dark Pool Buy Zone levels for getting into the stock for a run up from support levels.
Below is a chart of AMZN, which reports earnings on Thursday this week after the market close.
It shows that support is strong near the current price level. This indicates that the Dark Pool Buy Zone is within that technical price range. Selling short is inherently higher risk as the support level is a long-term trend strong support.
Why is it so strong?
1. There is a several-week price range that held the stock up.
2. Highs are a support mechanism when the stock market is not in a long-term downtrend. ALL
traders should know that this is not a bear market. Indexes are in a Trading Range.
3. The length of the candles is significant and relevant to the strength of the support.
⚠️ Risk Management Examples Showcase📍What Is the Risk/Reward Ratio?
The risk/reward ratio marks the prospective reward an investor can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns. A lower risk/return ratio is often preferable as it signals less risk for an equivalent potential gain.
📍Consider the showcased example:
An investment with a risk-reward ratio of 1:3 suggests that an investor is willing to risk $100, for the prospect of earning $300. Alternatively, a risk/reward ratio of 1:4 signals that an investor should expect to invest $100, for the prospect of earning $300 on their investment.
Traders often use this approach to plan which trades to take, and the ratio is calculated by dividing the amount a trader stands to lose if the price of an asset moves in an unexpected direction (the risk) by the amount of profit the trader expects to have made when the position is closed (the reward).
It is very important to calculate your R:R before entering a trade. Sometimes the trade might not be worth the amount you're risking vs the reward you can get.
👤 @AlgoBuddy
📅 Daily Ideas about market update, psychology & indicators
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USDJPY!!!! It's Time to Short!!!!USDJPY is currently in a longer uptrend on weekly and monthly timeframes. I only believe in multiple timeframe analysis because trends are more obvious on bigger timeframes and we can anticipate the market conditions on 4 to 6-factor lower timeframes than what will be the next move of the market in the next one or two weeks probably.
On weekly timeframe there is a bearish candle and 20 period moving average has touched the big red candle. History says when this happens the next candle moves downward.
If I see the situation on daily timeframe the market has touched the resistance 137.077 and currently last candle is bearish engulfing pattern candle that adds more fuel to the cause. Second thing on daily timeframe confluence is that market is far away from 20 period moving average that shows market will retrace or breath before going higher.
On my entry 4H timeframe, I am anticipating that market will move a little higher or breath a little before continuing the ride downwards. A little upward movement and I will go short for possibly 1:2 Risk to reward in next one to two weeks.
Risk-to-Reward > Win RateWe have mentioned it in a list of our previous educational posts and we will state it again: your risk-reward plan is much more important than your win rate. You can have a 90% win rate and still be losing in the long-run. On the contrary, you only need a 35% win rate to be a consistently profitable trader on the longer term.
Beginners mainly focus on winning as many trades as possible and it is totally understandable, because we have all been there. "The more trades I enter, the more money I will make" principle has destroyed many trading careers. The explanation to the "Why?" question is pretty simple: when we are new to trading, every win gives us euphoria and makes us think we are the rulers of the market. Guess what happens next, the market hits back, puts us in a position where we are stuck in a losing streak, and humbles us enough to quit trading and think it does not work.
As we get more experienced, we lean towards the "Less is more" principle and believe that quality will always be over quantity.
As an instance, we have orchestrated 2 scenarios on the graph.
The example on the upper side of the screen shows how our trader has a 80% win rate but has yet failed to remain in profits due to the fact that he does not have a solid risk management plan.
On the opposite side of the road, we have Trader B who is able to remain in consistent profits by winning only 20% of the executed transactions. All those minor losses that he made got covered by one big win, and as long as he keeps following the current risk management policy and strategy of his, he is sure that he will be consistently profitable in the long run.
TRADE UPDATE: 12R has now been achieved on the front sideEIGHTCAP:BTCUSD
Price moved aggressively to our target and I manually exited my positions with a solid 12R gain. I've now entered the backside short position with a 1 R risk, knowing that I will walk away in the worst case with an 11R trade here.
In profit,
The Meditrader
16 R Front Side/Back Side Trade on BitcoinEIGHTCAP:BTCUSD
I'm currently in this trade to the long side for the majority of the overall move (12 R) , but there's still a chance to capture the potential 4 R trade to the downside.
I'm expecting the bulls to push the price up to the pre-break level and take out that imbalance before making a move back to the downside and test previous support, both of which lines up with ATR.
LONG--SHORT
USDCHFGood Afternoon Kings & Queens. Here in this picture we have a nice trading pair USDCHF. Which is United States of America Vs Swish France Dollar. I don’t have a bias on this pair, all I am sure of is that it’s going to move. If anything happens that we are hunting then I will keep you all updated!
Bearish bat Usdjpy has created a bearish bat pattern in h4 chart, we see the XA leg as an impulsive leg because the swing in A broke a previous low and this thing is really positive because shows that the sellers are becoming stronger and it could be a first signal of a Change of Character (market changed from bullish to neutral now).
We have fundamentally 2 possibilities to trade this kind of setup , the first one has the imbalance as target, that specific zone is really intereasting because there is an orderblock whereas the second opportunity can let us make big money if price breaks the lat low and starts a mean reversion.
Send me a message if you want to be updated and trade with me and my team!
Enjoy your trading and apply solid MONEY MANAGEMENT RULES!!
tHE ITALIAN TRADER!
NZDCAD bat pattern NZDCAD created a bearish bat pattern and is now trading a little bit above 0.886% retracement of the XA leg.
If you look at the volumes you can clearly notice that the pressure is shrinking and now there are high probabilities of a retracement towards the Point of Control in H4 chart (which also corresponds at 0.618% of Fibo retracement of AD leg).
Enjoy your trading!!
Whats the difference between Risk Management & Money Management?TLDR:
Risk management generally is determining what portion of your capital you are willing to risk in a trade and staying true to that.
Money management is how you would spend the money earned (in this case through trading) .
Eg : Rather that withdrawing all the profits from your account you can let it be there and compound it, or rather than spending it on unnecessary luxuries you can save it for a rainy day .
_________________
Full:
This is something I usually get asked many times by new starters in trading as they are both common terms that you will hear as you learn about trading and investing. They are both vital concepts but it's important that you know the difference between them.
Money management refers to the processes of budgeting, saving, investing, spending, or otherwise overseeing the capital usage of an individual or group. The term can also refer more narrowly to investment management and portfolio management.
Money management broadly refers to the processes utilised to record and administer an individual's, household's, or organisation's finances.
Financial advisors and personal finance platforms such as mobile apps are increasingly common in helping individuals manage their money better.
Poor money management can lead to cycles of debt and financial strain.
In the financial world, risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyses and attempts to quantify the potential for losses in an investment, such as a moral hazard, and then takes the appropriate action (or inaction) given the fund's investment objectives and risk tolerance.
Risk is inseparable from return. Every investment involves some degree of risk, which is considered close to zero in the case of a U.S. T-bill or very high for something such as emerging-market equities or real estate in highly inflationary markets. Risk is quantifiable both in absolute and in relative terms. A solid understanding of risk in its different forms can help investors to better understand the opportunities, trade-offs, and costs involved with different investment approaches.
USD Retracement Incoming!! Must Watch Hello traders!
Please see our breakdown and opinion of the current Usd index.
Breakdown -
Price has been respecting this bullish dynamic support since late October and we have seen multiple tests of this area as it ascends.
We have identified what we think is some 4hr exhaustion in the orange box. It is also apparent from the daily time frame that may have ran out of steam and at the very least a correction is about to be forthcoming.
We have a bearish bias for the Usd Index for W/C 06/12.
There is some additional confluence factors we however would like to see : -
: - we would like to see price break and close below our ascending trend line.
: - we would like to see price retest our trend or our structure area.
Note the analyses from this index will be used to add confluence to any Usd currency pairs that we are monitoring next week.
Let me know in the comments below what your thoughts are on the Us Dollar just now and if you like the content and want to see more like this hit the follow button and give me a thumbs up!
The Fx Charist
Aud/Nzd Long Opportunity Please see above analysis off Aud/Nzd.
This pair has gone through a nice impulse, correction and we are now in the impulse phase again.
We have recently broken the descending channel and we are retesting a key structural level.
We are targeting the previous swing high.
As always please let me know in the comments below your thoughts on Aud/Nzd and if you this is a pair you are currently watching.
Have a brilliant week!
The Fx Chartist
GBPUSD LONG Please see above our analysis of Gbpusd.
We posted a long set up last week for this pair however it appears we were slightly pre-mature with the set up. This should of been identified with the descending daily channel that we are currently in and the bearish flag we identified last week but we missed the descending channel.
After identifying this we can clearly see we should expect some bullish pressure with the top of the channel in sight. Plenty opportunities will arise to get in on this pair along the way back to the top of the channel.
You can look for entries now on lower time frames with stops below the recent low or wait for further confirmation with some new 4hr structure again with stops below the new low.
As always let me know your thoughts on this pair and where you think were headed in the comments below.
Have a brilliant week!
The Fx Chartist
Tesla ShortHi Traders,
This is one of our latest ideas on Tesla.
After seeing an extension from the 10/20 EMA as well as a spike in volume with divergence on 4H RSI taking into consideration "cause and effect", we should see a solid movement here and a retrace to the 50/618FIB and back to trendline - testing the 200MA and daily 200MA.
This is a 1:14 risk to reward.
Please see below for further details on us.
TH from RT_Trading