02/08/2022
Mentality Mondays 🧠
Using risk vs reward to measure your trade success is a healthy habit to adopt.
Rather than focusing on trade profit, we need to look at how much we risked in order to make the profit. Risking $100 on a trade to gain $100 profit carries poor risk/reward. Risking $100 on a trade that returns $500 profit carries a higher R/R.
Risk is measured as the difference between our entry price and the price at which we plan to sell the stock at a loss. If our entry price is $5.00 and we plan on taking a loss at $4.50, our trade risk is .50 cents per share.
Reward is measured as the difference between our entry price and the price at which we sell the stock for a profit. If our entry price is $5.00 and we sell the stock at $6.00, our reward is $1.00 per share.
Trade Recap!
Risk: $0.50 per share
Reward: $1.00 per share
If we sold the trade for a profit, our reward/risk ratio is 2:1 on the trade as we profited twice the amount that we risked.
When approaching your trades and tracking success, risk vs reward should be factored into your trade plan. Practicing habits such as this can help you become a profitable trader 👊