Risk-to-Profit Ratio and More: How to Make More Profitable Trades

risk-to-profit ratio
Image Credit: Royal Anwar on Pixabay

In this post, we are going to talk about the trading business. Specifically, we’re going to discuss how traders can use certain principles, including the risk-to-profit ratio, to manage their business and make more money.

 

Adhere to Your Risk-to-Profit Ratio

As a trader, every time you make a trade, you should establish a goal. In other words, what do you want to accomplish with this trade? As you answer that question for yourself, the size of your position will become clear to you. Additionally, you’ll be planning for a successful trade.

In order to establish your goal, moreover, you’ll need to understand your risk-to-profit margin. What this means is that you’ll understand how much you’re willing to risk in order to possibly gain the profit this trade could make for you. All the while, you’ll understand that any trade is, indeed, a risk. Therefore, the trade might not go the way you hope.

This concept is a fairly simple one and easy for most people to grasp. That’s because any business person must go through this sort of reasoning process in the course of running almost any kind of business.

However, if you will take the time to think through your trades in this manner before you make them, you’ll have a better chance of making more profits from your trades.

 

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Define Your Risk Factors

You’ll determine your own specific risk-to-profit ratio by understanding your own risks. The level of risk tolerance varies greatly from trader to trader. For example, you might feel comfortable risking five percent of your account balance. On the other hand, another trader might feel safe risking only two percent of theirs.

For this reason, it’s imperative that you have a good grasp on your own level of risk tolerance. Only in this way can you can craft the best risk management policy for you.

Professional Singaporean traders in the exchange traded funds community suggest never risking more than two percent of your account balance in any one trade. They stress that it’s unnecessary to take big risks in order to earn a decent profit. Instead, aim for a high reward-to-risk ratio. This will allow you to earn good money without taking big risks.

 

Use Your Own Trading Edge Properly

Each and every trader in the world has their own unique trading edge. You will determine your trading edge by taking into account your training, your experience, and the skills you have gained so far in your trading career.

For these reasons, your trading edge will change over time. As a matter of fact, as you gain experience and education about trading, your edge over other traders is sure to grow.

Moreover, your trading edge is really important. It is the core of your trading performance. It will affect everything you do with your trading, including the sizes of your positions and the ways in which you will analyze the market.

Additionally, you will set your stop-loss and take-profits points based on your trading edge. From your earliest days as a trader, you’ll be creating your own trading edge by way of your own effort. At the beginning of your career, your trading edge will be weak. However, as you gain experience your trading edge will improve. In time, you will have the satisfaction of knowing that your trading edge is solid. And your trades will bring you profits regardless of the condition of the market.

 

Understand That Stop Loss Orders Are Good for You

An exceptional tool for preventing and minimizing losses is the stop-loss order. With the stop-loss order, you can maintain the quality of your trading regardless of the risks.

A stop-loss order sets a loss limit on your trades. Therefore, when the market condition reaches a condition that you have defined ahead of time, the trading platform automatically closes the trade. You should use stop-loss orders on every trade you make.

 

Conclusion

Employ the principles we have discussed here for more profitable trading:

  • Risk-to-profit ratio
  • Understanding your own risk factors
  • Using your trading edge properly
  • Utilizing stop-loss orders

These principles can help you to become a more successful trader, regardless of the market in which you operate.


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