JACKIS Profile picture
Feb 18 โ€ข 25 tweets โ€ข 8 min read
RISK to REWARD / COST to BENEFIT ๐Ÿ“š

๐Ÿงต In-depth thread about this phenomenon, that can be used in various aspects of our lives. Not just in trading

This will IMPROVE your life ๐Ÿ‘‡

1/25
Risk to reward, in shortcut RRR or just RR, is an amazing concept that we use every day without even realizing it

But it is exactly that realization, which you will learn here, that will help you identify & use it effectively

2/
This concept is mainly to realize that everything we do in our lives and every decision we take involves risk/cost

The RR ratio then calculates how much reward there is for such risk

It can also be described mathematically as 0,2:1 / 2:1 / 5:1 and so on

3/
We understand this in trading a lot but we forget that we also risk when we cross a crosswalk and even on a green light

The chances you gonna cross safely are high but there is still a tiny chance you're gonna get hit by a car regardless

4/
In such terms, we could say the RR ratio is really high

In life, we don't have time to calculate it each time but we should be able to understand, there is still some risk & our goal is to minimize it as possible at the lowest cost (This is important & more on that later)

5/
- The basic state is crossing the road -

Here are a few ways to improve the RR

1) Using the crosswalk
2) Crossing on a green light
3) Looking left and right that no car is approaching before crossing
4) Using all of the above

Each of these raises the ratio to our favor

6/
If the basis state was (random) 500:1 of not getting hit then while doing all the points mentioned above we could've raised the ratio to 50000:1

Important to realize: Even while doing all of those, there is still risk involved and can never be erased, only minimized

7/
The cost of minimizing the risk

Everything in life costs some scarce resources. While maximizing the RR ratio in our favor we gotta realize it also has costs and then it is up to us to decide how much "cost" we wanna pay for the lower "risk"

8/
In our example the "cost" of lowering the risk was

1) Finding the crosswalk - energy to get there + time
2) Waiting on a green light - time
3) Looking left and right before crossing - Muscles and time to move the head

We could also add sounds to the equation instead earpods

9/
It is then up to each individual to decide whether the resources are worth lowering the risk

It will also differ depending on time & place and other factors

Many of these decisions are done in subconscious mind but if you realize them & make them your habit you can benefit

10/
Also it is very important to understand that each of us has a different risk tolerance

While some will prefer to lower the risk some will prefer to lower the resources & take the higher risk

Hence why there is not 1 single best way to do things but differs for each person

11/
This understanding should create respect for others towards you & for you to respect others' decisions

If all of us do the world would be a better place

While one can invest in bonds & consider stocks risky, the other can invest in #crypto & consider stocks not interesting

12/
Now to understand the risk to reward in trading/investing, there is an easy tool to calculate our ratio

We use 3 levels:
1) Entry
2) Invalidation
3) Target

In this example, the ratio was 2,36:1 & 3,4:1

The cost here was the capital used & time during the trade

13/
Now a small mental game if we use this analogy for our cross-the-road example

We use 3 levels:
1) Entry (Entering the road)
2) Invalidation (Getting hit by a car)
3) Target (Successfully crossing the road without getting hit)

14/
We also need to measure the probability/ability (cost) of a setup/life situation

In the crosswalk example, it would be your ability to cross the crosswalk and not collapse midway

With crosswalk, it's easy to understand, but how about crossing continents on a small boat ๐Ÿค”

15/
In trading/investing, however, not always higher the RR ratio equals a better outcome

We also need to be able to analyze probability where the price can & cannot go and adjust the RRR tool

In example 1, RRR was "only" 2.36 but worked
In example 2, RRR was 17 but failed

16/
And while traders can use price as invalidation to measure RR, investors can use asset/company & their invalidation is basically the collapse of the given market/firm

Their cost to that trade is time and opportunity cost, should the asset stay in that range for a long time

17/
A recommended risk on trade/investment is 1-3% of your capital

Again basic principle, higher the risk, higher the reward, and vice versa

If the project has a higher risk, you should risk less, and vice versa

18/
If an investor sees some asset as an opportunity and his invalidation is basically zero, then he needs to calculate the risk of such asset going to zero or the time it will need to recover

19/
For example, if you invested in the #DowJones index at the peak of 1929 before The Great Depression and held through the whole drawdown, it essentially took you 15 years of opportunity cost just to get to break even.

With #Nikkei, it has been 33 years and not yet to B/E

20/
As you can see there is NO RIGHT WAY to do it. Each of the techniques has pros & cons & each suits a different person

Its not that investing is better than trading and vice versa

But the Risk to Reward tool can help us a lot understand the potential risk & costs for reward

21/
One way to highly mitigate the risk is by diversifying

Across markets/pairs/stocks/countries and so forth

But that has costs too. Like managing so many portfolios

The goal of this thread is to give you the idea of RR and to think about its implications for your life

22/
As for trading which is my expertise, what I found being the "sweet spot" risk to reward is somewhere around 2-5R

Anything below is not worth the reward, anything above involves too much risk

That said I've seen successful traders with boh higher & lower R

23/
But more often than not, those who aim for too much, get too little and those who aim for too little, get a bit of nothing

Hindsight RR is nice but for real trading, 2-5 will do it for you

24/
I hope this thread was helpful to you and that it will help you utilize this great tool in your real life

Remember even a jump into a swimming pool uses this

If you found this thread helpful/insightful, please consider writing a comment below and RT. Thank you for your time ๐Ÿ™Œ

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More from @i_am_jackis

Jan 27
๐Ÿงต The biggest problem with #Crypto Twitter is that it has wrongly set out incentives

It rewards OGs for tweeting stuff people WANT to hear but not what they NEED to hear

That's the direct reason why some most hated accounts have the largest followings

Read below ๐Ÿ‘‡

1/18
The reward system on Twitter is mainly through 4 things:

1) Likes
2) Retweets
3) Comments
---------------
4) Followers - A way we measure "success" / social-economical status

Where number 4 is growing based on the 3 above

2/
There is however no economic incentive to post regardless of that

And remember, whenever there is something free, there is a (hidden) price for that (majority of the times)

3/
Read 19 tweets
Jan 26
The Market Maker REKT Model ๐Ÿงต

This entire run-up in January is very tricky to play

Most #ALTs, including #Bitcoin, look like this or very similar

After a year of down only, people have PTSD to just blindly buy here, reasonably so, so they wait for the "proper" pullback

1/5
The market however is not giving any clean retests and this creates frustration and "built-up energy" in the market

Until it finally does retest. Most are happy and finally get in. If lucky, the market creates another swing higher.

2/
That's when most sidelinooors & bears can't take it anymore and FOMO

IMO we are currently around wave 4, to fulfill wave 5

They were all dragged to slaughter as the market finally does that HTF pullback they were all waiting for initially

3/
Read 5 tweets
Jan 22
#Bitcoin has reversed and confirmed its trend change as the majority of #crypto experts still fail to accept it and will be missing out.

The question is, will you โ“

Find out why in this thread below ๐Ÿงต๐Ÿ‘‡

1/
Nearly all major longer-term tools a lot of people use such as market structure, moving averages, supertrend, RSI, MACD, MVRV, Puell, % drop, and so on are pointing out to a trend reversal

That by itself wouldn't matter that much, it's the CONFLUENCE that matters here

2/
So first of all it's important to realize the time spent during each bear market + the percentage drop!

Diminishing returns each bull = diminishing drop each bear

With higher market capitalization the volatility will also diminish.

3/
Read 24 tweets
Nov 25, 2022
What most people dont realize is that what has happened to #FTX can happen to literally any bank in the world at any time

Banks run on a fractional reserve system & yes, they hold far less reserves than FTX had

FTX was then nothing more than a better TradFi-crypto bank ๐Ÿ‘€

1/4
If people for some reason do a bank run on any of your fiat banks, it will collapse

Had for some reason people start doing it in herds on multiple banks, the fear would spread & the system would collapse.

Then only hard assets such as #Bitcoin | #Silver | #Gold would be secure
When u deposit money (currency) to a fiat bank, it's not your money anymore

When u deposit money (#Bitcoin) to a crypto bank (exchange), it's not your money anymore

Crypto banks need far more reserves than traditional banks & you can always opt-out to spot #BTC, unless too late
Read 4 tweets
Nov 1, 2022
I've been saying this before and I'll say it again, #Bitcoin is trading as a digital commodity ๐Ÿ’ฏ

The rules are simple...

If you are bearish on #BTC you are bearish on #Copper. If you see new ATHs for COPPER you are seeing new ATHs for BTC as well ๐Ÿซก

1/4
#Bitcoin is here to stay, whether you like it or not.

The big difference between the two is the volatility of a new asset. Where one does 100% the other does 1000%. The same goes for HTF pullbacks.
The math is then pretty simple.

We live in a world of unlimited credit/fiat money, where governments/CBs, even if they don't want to, will be forced to "print digitally"

But we also live in a world of limited scarce assets.

Infinite credit will be chasing finite assets.
Read 4 tweets
Oct 8, 2022
How do you solve the unaffordability of houses for the young ones, when the older ones are using them as a Store of Value to defend themselves against an inflating currency?

You change the Store of Value for the older ones -> #Bitcoin
In the end, you could see countries guiding people to rather store value in #BTC than real estate

It's a far better solution than putting a price cap on it

Then real estate will once again become way more affordable
I can see this shift gradually happening over the course of the next 10-20 years

The value is then being secured by the most powerful, physical (PoW), most robust defense system in the world.

And that is the future
Read 4 tweets

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