Long and short position (risk/reward)

The idea in plain words

Before a trade, decide where you are wrong (stop) and where you take profit (target). If the possible gain is at least twice the possible loss, you can be wrong more often than right and still come out ahead over many trades.

How it is calculated

Click the entry. Drag the target and stop handles to your levels and the right edge to your time horizon.

Risk = |entry − stop|
Reward = |target − entry|
Risk/reward = 1 : (reward ÷ risk)

How to use it

• Look for setups with reward at least 2× the risk.
• Work out position size from the risk: money you accept to lose ÷ risk per unit.

Drawing conclusions

• A 1 : 3 trade needs to win only a little over one time in four to break even (ignoring costs).

Watch out for

• The plan is only as good as your discipline in following it.
• Costs (spread, commissions) reduce the real reward.

A little history

Risk/reward planning is a basic rule of trading risk management.