Why Risk to Reward Ratio is more important than percentages
In trading, there are three percentages that many traders place a lot of importance on – potential profit, potential loss and win rate. Focusing on these percentages is not likely to result in you being consistently profitable. Even if you have a high win rate, you could still be losing money over the long term if your losses regularly outweigh your profits.
When used in conjunction with having a set percentage of your account you will risk per trade, it is actually the Risk to Reward Ratio (RRR) that is the most important metric to consider, because it is a significant determining factor in whether or not you will be profitable in the long term. With the right RRR, you can still be profitable even with a low win rate.
As one of VEMA Trader’s Technical Advisors, Rhys, teaches – look for trades that have minimum risk and maximum reward.
As you can see from the table below, if you enter trades that have a minimum RRR of 1:3, you only need to win 26% of your trades to be profitable. Knowing that you can be wrong 74% of the time and still make money does wonders for a trader’s psychology, as losses are no longer something to be feared. The more that you can remove emotion from trading, the easier it will be to become a strategic and disciplined trader.
So you may be wondering ‘Where does VEMA Trader come into the picture?’
VEMA Trader ensures you never trade again without a minimum RRR by incorporating RRR in each trade setup. To make life even easier, VEMA Trader performs all of the necessary calculations for you.
Let’s take a look at the image below to see what this looks like. Each time you open the Risk Management panel in VEMA Trader, your default account risk percentage and minimum risk to reward will already be set. You only need to enter your stop loss and your take profit when setting up a trade and VEMA Trader will calculate your estimated RRR, position size, leverage, loss and profit (shown in the green box). It couldn’t be any easier!
This is just another example of why VEMA Trader is an essential tool if you are serious about your trading and want to take it to the next level.
By Sam Sillett