What is Risk Reward & How To Have Proper Risk Reward
The market works in mysterious ways sometimes just go look at the
overall market drop during the 2020 pandemic and the quick climb back up. Many people jumped in on that crash and bought stocks and suddenly thought they were day traders without knowing what the float of stock even means!
These amateurs started day trading without any day trading education. Lucky amateur traders may suppose they “are a day trader now”. They trade big and small positions, to both the long and short side. They make money and in some cases a lot of money but eventually since they lack a day trading education they lose all of it and in some case, they lose even more than they started with! While you an educated day trader are still working your system or systems and racking in consistent profits over the long term.
There is no way for an amateur day trader to win long term if they lack
a day trading education. One of the main topics you will learn in a day trading education program is risk management this is absolutely essential to your long-term success as a day trader. You calculate risk-reward on every trade even if your risk is always $100 per trade you will still have to calculate your risk-reward on each trade to determine the share size you need to take in order to keep the same dollar amount risk as usual.
One reason risk management is of major importance in day trading is that during your day trading career you can actually be wrong more than you are right and still make money. You could take ten trades and only be right on 3 or 4 trades and if your risk to reward is on correct you could have made money and been green at that end of those ten trades you took. This is something you would learn step by step in a day trading education course or mentorship secession.
For example, if you participated in 10 trades with a $100 risk per trade
but you made $300 profit on your winning trades you could still make
Trade one you lose $100
Trade two you lose $100
Trade three you lose $100
Trade four you lose $100
Trade five you lose $100
Trade six you lose $100
Trade seven you lose $100
you have currently lost seven trade for a total of $700 in the red
Trade eight you make $300 profit
Trade nine you make $300 profit
Trade 10 you make $300 profit
you have now made $900 profit minus $700 in losers your trading
session or week has made you $200 profit
This worked out because you had a consistent risk-reward of 1:3 you risked one dollar for the shot at making three dollars. Of course, having only a 30% win rate can reek havoc on a trader's mental confidence but the point is that with proper risk reward even a trader in a slump can make money if they stick to the program and fall back on their day trading education.