Risk-Reward Ratio in Trading

by Andrea Unger

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Transcription

Hi guys, hi from Andrea Unger! Today, I’d like to spend a few words on the risk-reward ratio in trading. For instance, is it true that a 3:1 risk-reward ratio is the best one, or is this just a legend?

According to many traders, the ideal risk-reward ratio is 1:3. Actually, some people believe this is the Holy Grail of trading.

However, I do not agree with them. The risk-reward ratio depends on the type of strategy you use. So, there are strategies in which you might have a reward that is even smaller than the risk.

I have plenty of these strategies. Am I crazy? No, I am not, because the point is these strategies have a winning percentage that is much higher than 50% (the coin toss percentage).

Suppose we have a strategy with a stop loss of $1,000 and a take profit of $500, and we have 10 winners and one loser. If we win $500 ten times and lose $1000 once, this means we gain $4,000.

So, as you can see, the kind of strategy you use plays a major role.

In the case with classical trend following strategies, or long-term trends, you normally don’t use a take profit, as it would cut your runs, and that would be a nonsense. Therefore, the reward is much wider than the risk. However, in these strategies you are stopped out very often; you can have false breakouts and trends that don’t start.

So, you enter many times and get many small stops. However, when you finally win, you gain a lot. This means you have a large risk-reward.

Instead, if you use countertrend strategies, rebound strategies, swing trading strategies and the like, sometimes you use take-profits that are smaller than the stop loss you put in place. The reason is that you want to catch a fast rebound and leave breathe to the trade if it goes against you. Actually, you wait for that moment when the move changes direction.

To conclude, the 1:3 ratio is nothing but a legend. This is probably told by people who never clicked on a mouse to catch the trade. Believe me, risk-reward ratio depends on the kind of approach you adopt.

Stay tuned!

Ciao from Andrea Unger!

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Andrea Unger

Andrea Unger here and I help retail traders to improve their trading, scientifically. I went from being a cog in the machine in a multinational company to the only 4-Time World Trading Champion in a little more than 10 years.

I've been a professional trader since 2001 and in 2008 I became World Champion using just 4 automated trading systems. 

In 2015 I founded Unger Academy, where I teach my method of developing effecting trading strategies: a scientific, replicable and universal method, based on numbers and statistics, not hunches, which led me and my students to become Champions again and again.

Now I'm here to help you learn how to develop your own strategies, autonomously. This channel will help you improve your trading, know the markets better, and apply the scientific method to financial markets.

Becoming a trader is harder than you think, but if you have passion, will, and sufficient capital, you'll learn how to code and develop effective strategies, manage risk, and diversify a portfolio of trading systems to greatly improve your chances of becoming successful.