Often, beginners want to know, “𝐇𝐨𝐰 𝐦𝐮𝐜𝐡 𝐜𝐚𝐧 𝐈 𝐦𝐚𝐤𝐞?” 🤩
instead of “𝐇𝐨𝐰 𝐦𝐮𝐜𝐡 𝐰𝐢𝐥𝐥 𝐈 𝐥𝐨𝐬𝐞?” 😵
The correct question is, “𝗪𝐡𝐚𝐭’𝐬 𝐭𝐡𝐞 𝐫𝐢𝐬𝐤?” 𝐨𝐫 “𝐇𝐨𝐰 𝐦𝐮𝐜𝐡 𝐬𝐡𝐨𝐮𝐥𝐝 𝐈 𝐫𝐢𝐬𝐤?” 🧐
Trading/Investing is just a game of probability. 🎲
You’re risking a certain amount of money under a specific market condition, with the available information you have and making the best prediction. 🔮
Because none of us are wizards and the future is always uncertain, knowing your risk is perhaps the most crucial element of trading/investing. 🧙♂️
Personally, the risk/reward ratio is my bread and butter. There are a lot of traders focusing on the winning rate, and sure, it will be great to win and win a lot - but mathematically speaking, even though the probability of coin flip might be 50/50, but each flip is entirely random and also at 50/50. 🥥
𝐓𝐡𝐚𝐭 𝐦𝐞𝐚𝐧𝐬 𝐭𝐡𝐞 𝟓𝟎/𝟓𝟎 𝐬𝐡𝐨𝐭 𝐨𝐧𝐥𝐲 𝐚𝐩𝐩𝐞𝐚𝐫𝐬 𝐰𝐡𝐞𝐧 𝐭𝐡𝐞 𝐬𝐚𝐦𝐩𝐥𝐞 𝐬𝐢𝐳𝐞 𝐢𝐬 𝐥𝐚𝐫𝐠𝐞 𝐞𝐧𝐨𝐮𝐠𝐡.
A lot of technical traders love to use backtesting to create a strategy with a high winning rate. However, even if you have an 80% winning rate, you will never know when the 20% losing will come - or worse, how big is that size in reality. 🤭
You might lose 20 out of 100, or perhaps, 200 out of 1000, so even if you take 1% risk per trade, you would have lost 200% before you start to win…😭
Of course, this is an extreme example and to make a point that I think the risk/reward ratio is much more critical in the aspect of trading!
Because of that, how much you should risk is determined by how much you can win potentially.
If you risk $1 to make 20 cents, then you’re much better off not to take the trade at all! 🤦
𝐓𝐫𝐚𝐝𝐞𝐫𝐬, 𝐰𝐡𝐚𝐭 𝐚𝐫𝐞 𝐲𝐨𝐮𝐫 𝐭𝐡𝐨𝐮𝐠𝐡𝐭 𝐨𝐧 𝐭𝐡𝐢𝐬?