Risk Reward Ratio – Higher Risk, Higher Win!
Have you seen all the posts from traders showing the massive percentages that they are making on trades? Like this one?
There are a couple of take-aways from this. Number one is that the FTX trade above used 20x leverage. This means that the margin from the trader’s account used in that trade was a 20th of what was needed for the position size. Divide the percentage win by 20, and you have a better idea about what the total position size gain was. In this case the trader put in a 20th of the margin needed for a position size that moved 12.58%. The actual percentage move on the coin itself was 12.58%. Multiply this by the 20x leverage and that gives you the 251.63%.
Well that is impressive!
If you’re new to trading you might be impressed by this, but have you noticed how VEMA Trader doesn’t share percentages like this, just Risk Reward Ratio and Profit and Loss change?
As you can see the trade result looks impressive. It in no way however, reflects what the trader made on his or her account. Nor does it reflect what the actual move in the asset price was. Unless you know to divide the total percentage by the leverage and calculate the Risk Reward Ratio!
How much a trade has made you (or someone else) is based on the Risk Reward Ratio. If you risk 1% of your account to make a trade, that is how much you are willing to lose if your Stop Loss is hit. Examine closely when measuring up a move. Look at where your stop loss needs to be. The target for profit is a multiple of your stop loss. In the example below, this equals 1% account risk for 2% account profit. The profit on the trade box below shows a 100% move, but can you see how that is irrelevant to the outcome?
So what are the brag screens that people are sharing really showing you?
If you’re risking 1% of your account to make 2% growth on your account, and you win 4 out of 10 trades, that’s an 8% account growth. This gives you a 6% loss and an aggregate 2% growth overall.
This table sums it up nicely.
Here is an overall analysis from a VEMA Trader account, demonstrating nicely how little you have to win to be profitable. Even with only a 26% win rate, this account is still profitable thanks to the high Risk Reward Ratio.
The real power of the VEMA Trader sharable outcome card is that is is a TRUE reflection of how a trader has performed. No tricks, no calculations necessary!
(yes I did cherry pick one of my better trades for this!)
When you really understand the power of compounding over time, you can see how few wins you need week by week for that to equal significant account growth over longer periods.
More on that in my next post!
Read more about how Risk Reward Ratios are implemented on Anthea’s post here !
By Jamie & Joel