21 May, 8 tweets, 3 min read
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The power of a good Risk Reward Ratio (RRR)

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When using a RRR of 1:3 it means that your Risk (Stoploss) is 1 and your Reward (target 1) is 3. So your Reward is always 3 times as big as your Risk.

So, for example: When I take a trade with \$100 Risk, it means that my Reward is \$300.
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When your tradesetup has a 5% stoploss (Risk) it means that target 1 (Reward) has to be atleast 15%.

When your tradesetup has a 2% stoploss (Risk) it means that target 1 (Reward) has to be atleast 6%.
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Definition of Risk:
Risking \$100 doesn’t mean you have a \$100 position. It means that when the SL gets hit you lose \$100 dollar. Most traders risk max 1% of their tradestack on a trade.
When someone has a \$10.000 tradestack it means he will lose max \$100 when his SL gets hit
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5% loss on \$10.000 = \$500

So how do I make sure I still risk only 1% on my full tradestack? It’s called “Position Sizing”.
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When you know your stoploss percentage you can calculate the position by dividing the total tradestack by the stoploss percentage.
When the stoploss is 5%, you divide your total tradestack by 5.

5% stoploss on a \$2.000 position=\$100!
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One more example:

You found a setup with a stoploss of 2%. Again, you can’t enter with your full tradestack, so you have to divide your tradestack by the stoploss percentage.

\$10.000/2=\$5.000

2% stoploss on a \$5.000 position=\$100!
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RRR and position sizing are both part of riskmanagement. The only way to become a profitable trader is by mastering riskmanagement.