Risk reward ratio
Never risk more than you can get. This is just stupid. Always try to make at least twice the money you risk. If you see that you can’t get 1:2 ratio don’t trade.
You will determine your risk/reward ratio measuring your
stop loss (based on price action) and target support/resistance area. More on
that later.
Starter’s kit
Once you have opened your account and deposited minimum amount possible trade for a month with 0.01 lot. Write a trading journal and analyze every trade you take or think of taking.
After a month measure how well were you doing. Measure you winning percentage, see what setups work best.
Do not think you are above the process. Get a proof first.
So you trade for a month, journal every trade, analyze and learn from your mistakes. At the end of the month measure your win rate. If it’s above 50% proceed, if not stay with 0.01 lot.
If you were trading well you can increase your risk using risk of ruin tables in the next chapter.
Measure your win rate for different setups you take. If you win 80% of trend following trades and 50% of counter trend trades you can determine risk on the average of 65% or different risk appetite for different type of trade.
This way when you take setups that have very high odds of winning you make a lot, while playing safer the ones that doesn’t.
Ultimately you should stop trading setups that doesn’t have
good winning odds. This is pretty personal thing, so you have to see what works
for you.
Risk of ruin
Once you have measured your win rate you can determine your real risk appetite using risk of ruin tables. For example if you take a trade with 1:2 risk/reward ratio and you win 65% of the time you can risk 10% of your account and never blow your account. However if you win only 50% of the time maximum risk allowed is 5%. I have included risk of ruin tables for different risk amounts below.
Always make sure your risk of ruin equals zero. So by
following this formula and increasing your win rate and getting better risk
reward ratio your maximum risk allowed increases as well as your profits. This
will cause parabolic growth when you are master trading and keeps you from
losing your account when you need more practice to become master. It’s a
win-win!
Risk of Ruin Formula using 10% Risk / Trade
| ROR% with 10 capital at risk | |||||
| Win Ratio % | R:R 1:1 | R:R 2:1 | R:R 3:1 | R:R 4:1 | R:R 5:1 |
| Win Ratio 10% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 15% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 20% | 100 | 100 | 100 | 100 | 46.6 |
| Win Ratio 25% | 100 | 100 | 100 | 30.5 | 16.3 |
| Win Ratio 30% | 100 | 100 | 27.7 | 10.2 | 6.1 |
| Win Ratio 35% | 100 | 60.9 | 8.2 | 3.53 | 2.33 |
| Win Ratio 40% | 100 | 14.2 | 2.5 | 1.24 | 0.888 |
| Win Ratio 45% | 100 | 3.41 | 0.761 | 0.426 | 0.329 |
| Win Ratio 50% | 100 | 0.813 | 0.226 | 0.141 | 0.116 |
| Win Ratio 55% | 13.4 | 0.187 | 0.0635 | 0.0438 | 0 |
| Win Ratio 60% | 1.73 | 0.0401 | 0 | 0 | 0 |
| Win Ratio 65% | 0.205 | 0 | 0 | 0 | 0 |
| Win Ratio 70% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 75% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 80% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 85% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 90% | 0 | 0 | 0 | 0 | 0 |
Risk of Ruin Formula using 5% Risk / Trade
| ROR% with 5 capital at risk | |||||
| Win Ratio % | R:R 1:1 | R:R 2:1 | R:R 3:1 | R:R 4:1 | R:R 5:1 |
| Win Ratio 10% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 15% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 20% | 100 | 100 | 100 | 100 | 21.7 |
| Win Ratio 25% | 100 | 100 | 100 | 9.33 | 2.67 |
| Win Ratio 30% | 100 | 100 | 7.67 | 1.03 | 0.372 |
| Win Ratio 35% | 100 | 37.1 | 0.672 | 0.124 | 0.0544 |
| Win Ratio 40% | 100 | 2.03 | 0.0623 | 0 | 0 |
| Win Ratio 45% | 100 | 0.116 | 0 | 0 | 0 |
| Win Ratio 50% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 55% | 1.81 | 0 | 0 | 0 | 0 |
| Win Ratio 60% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 65% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 70% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 75% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 80% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 85% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 90% | 0 | 0 | 0 | 0 | 0 |
Risk of Ruin Formula using 2% Risk / Trade
| ROR% with 2 capital at risk | |||||
| Win Ratio % | R:R 1:1 | R:R 2:1 | R:R 3:1 | R:R 4:1 | R:R 5:1 |
| Win Ratio 10% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 15% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 20% | 100 | 100 | 100 | 100 | 2.2 |
| Win Ratio 25% | 100 | 100 | 100 | 0.266 | 0 |
| Win Ratio 30% | 100 | 100 | 0.163 | 0 | 0 |
| Win Ratio 35% | 100 | 8.37 | 0 | 0 | 0 |
| Win Ratio 40% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 45% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 50% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 55% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 60% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 65% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 70% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 75% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 80% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 85% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 90% | 0 | 0 | 0 | 0 | 0 |
Risk of Ruin Formula using 1% Risk / Trade
| ROR% with 1 capital at risk | |||||
| Win Ratio % | R:R 1:1 | R:R 2:1 | R:R 3:1 | R:R 4:1 | R:R 5:1 |
| Win Ratio 10% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 15% | 100 | 100 | 100 | 100 | 100 |
| Win Ratio 20% | 100 | 100 | 100 | 100 | 0.0485 |
| Win Ratio 25% | 100 | 100 | 100 | 0 | 0 |
| Win Ratio 30% | 100 | 100 | 0 | 0 | 0 |
| Win Ratio 35% | 100 | 0.701 | 0 | 0 | 0 |
| Win Ratio 40% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 45% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 50% | 100 | 0 | 0 | 0 | 0 |
| Win Ratio 55% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 60% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 65% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 70% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 75% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 80% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 85% | 0 | 0 | 0 | 0 | 0 |
| Win Ratio 90% | 0 | 0 | 0 | 0 | 0 |
