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Best risk reward ratio for day trading
Applying risk management is crucial as a beginner
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!
The luck of the Newbies
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 sides. They make money and in some cases a lot of money, but eventually, since they lack the trading education they lose it all. And in some cases, they lose even more than they started with! While you an educated trader are still working your system and racking in consistent profits over the long term.
Long Term Effect
There is no way for 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 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 to keep the same dollar amount risk as usual.
One reason risk management is of major importance in day trading is that during your 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 3 or 4 times and still be green at the end. Even if you had 6-7 losing trades. How? Simple, by managing risk, multiple small red trades can be covered by one green trade. This is something you would learn step by step in a day trading education course or mentorship sessions.
If you participated in 10 trades with a $100 risk per trade but you made a $300 profit on your winning trades. You would still be green at the end.
First trade you lose $10
Second trade you lose $100
Third trade you lose $100
Four trade you lose $100
Fifth trade you lose $100
Sixth trade you lose $100
Seventh trade you lose $100
You have currently lost seven trades for a total of $700 in the red.
Eighth trade you make $300 profit
Ninth trade you make $300 profit
Tenth trade you make $300 profit
You have now made a $900 profit minus the $700 in losers, your week has made you a $200 profit.
This worked out because you had a consistent risk-reward of 1:3. Which in my opinion the best risk reward ratio for day trading beginners. You risked one dollar for the shot at making three dollars. Of course, having only a 30% win rate can wreak 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. The best risk reward ratio for day trading is learning risk management and applying it.
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