RISK to REWARD / COST to BENEFIT ๐
๐งต In-depth thread about this phenomenon, that can be used in various aspects of our lives. Not just in trading
This will IMPROVE your life ๐
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๐งต In-depth thread about this phenomenon, that can be used in various aspects of our lives. Not just in trading
This will IMPROVE your life ๐
1/25
Risk to reward, in shortcut RRR or just RR, is an amazing concept that we use every day without even realizing it
But it is exactly that realization, which you will learn here, that will help you identify & use it effectively
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But it is exactly that realization, which you will learn here, that will help you identify & use it effectively
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This concept is mainly to realize that everything we do in our lives and every decision we take involves risk/cost
The RR ratio then calculates how much reward there is for such risk
It can also be described mathematically as 0,2:1 / 2:1 / 5:1 and so on
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The RR ratio then calculates how much reward there is for such risk
It can also be described mathematically as 0,2:1 / 2:1 / 5:1 and so on
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We understand this in trading a lot but we forget that we also risk when we cross a crosswalk and even on a green light
The chances you gonna cross safely are high but there is still a tiny chance you're gonna get hit by a car regardless
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The chances you gonna cross safely are high but there is still a tiny chance you're gonna get hit by a car regardless
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In such terms, we could say the RR ratio is really high
In life, we don't have time to calculate it each time but we should be able to understand, there is still some risk & our goal is to minimize it as possible at the lowest cost (This is important & more on that later)
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In life, we don't have time to calculate it each time but we should be able to understand, there is still some risk & our goal is to minimize it as possible at the lowest cost (This is important & more on that later)
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- The basic state is crossing the road -
Here are a few ways to improve the RR
1) Using the crosswalk
2) Crossing on a green light
3) Looking left and right that no car is approaching before crossing
4) Using all of the above
Each of these raises the ratio to our favor
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Here are a few ways to improve the RR
1) Using the crosswalk
2) Crossing on a green light
3) Looking left and right that no car is approaching before crossing
4) Using all of the above
Each of these raises the ratio to our favor
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If the basis state was (random) 500:1 of not getting hit then while doing all the points mentioned above we could've raised the ratio to 50000:1
Important to realize: Even while doing all of those, there is still risk involved and can never be erased, only minimized
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Important to realize: Even while doing all of those, there is still risk involved and can never be erased, only minimized
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The cost of minimizing the risk
Everything in life costs some scarce resources. While maximizing the RR ratio in our favor we gotta realize it also has costs and then it is up to us to decide how much "cost" we wanna pay for the lower "risk"
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Everything in life costs some scarce resources. While maximizing the RR ratio in our favor we gotta realize it also has costs and then it is up to us to decide how much "cost" we wanna pay for the lower "risk"
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In our example the "cost" of lowering the risk was
1) Finding the crosswalk - energy to get there + time
2) Waiting on a green light - time
3) Looking left and right before crossing - Muscles and time to move the head
We could also add sounds to the equation instead earpods
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1) Finding the crosswalk - energy to get there + time
2) Waiting on a green light - time
3) Looking left and right before crossing - Muscles and time to move the head
We could also add sounds to the equation instead earpods
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It is then up to each individual to decide whether the resources are worth lowering the risk
It will also differ depending on time & place and other factors
Many of these decisions are done in subconscious mind but if you realize them & make them your habit you can benefit
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It will also differ depending on time & place and other factors
Many of these decisions are done in subconscious mind but if you realize them & make them your habit you can benefit
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Also it is very important to understand that each of us has a different risk tolerance
While some will prefer to lower the risk some will prefer to lower the resources & take the higher risk
Hence why there is not 1 single best way to do things but differs for each person
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While some will prefer to lower the risk some will prefer to lower the resources & take the higher risk
Hence why there is not 1 single best way to do things but differs for each person
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This understanding should create respect for others towards you & for you to respect others' decisions
If all of us do the world would be a better place
While one can invest in bonds & consider stocks risky, the other can invest in #crypto & consider stocks not interesting
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If all of us do the world would be a better place
While one can invest in bonds & consider stocks risky, the other can invest in #crypto & consider stocks not interesting
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Now to understand the risk to reward in trading/investing, there is an easy tool to calculate our ratio
We use 3 levels:
1) Entry
2) Invalidation
3) Target
In this example, the ratio was 2,36:1 & 3,4:1
The cost here was the capital used & time during the trade
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We use 3 levels:
1) Entry
2) Invalidation
3) Target
In this example, the ratio was 2,36:1 & 3,4:1
The cost here was the capital used & time during the trade
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Now a small mental game if we use this analogy for our cross-the-road example
We use 3 levels:
1) Entry (Entering the road)
2) Invalidation (Getting hit by a car)
3) Target (Successfully crossing the road without getting hit)
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We use 3 levels:
1) Entry (Entering the road)
2) Invalidation (Getting hit by a car)
3) Target (Successfully crossing the road without getting hit)
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We also need to measure the probability/ability (cost) of a setup/life situation
In the crosswalk example, it would be your ability to cross the crosswalk and not collapse midway
With crosswalk, it's easy to understand, but how about crossing continents on a small boat ๐ค
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In the crosswalk example, it would be your ability to cross the crosswalk and not collapse midway
With crosswalk, it's easy to understand, but how about crossing continents on a small boat ๐ค
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In trading/investing, however, not always higher the RR ratio equals a better outcome
We also need to be able to analyze probability where the price can & cannot go and adjust the RRR tool
In example 1, RRR was "only" 2.36 but worked
In example 2, RRR was 17 but failed
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We also need to be able to analyze probability where the price can & cannot go and adjust the RRR tool
In example 1, RRR was "only" 2.36 but worked
In example 2, RRR was 17 but failed
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And while traders can use price as invalidation to measure RR, investors can use asset/company & their invalidation is basically the collapse of the given market/firm
Their cost to that trade is time and opportunity cost, should the asset stay in that range for a long time
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Their cost to that trade is time and opportunity cost, should the asset stay in that range for a long time
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A recommended risk on trade/investment is 1-3% of your capital
Again basic principle, higher the risk, higher the reward, and vice versa
If the project has a higher risk, you should risk less, and vice versa
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Again basic principle, higher the risk, higher the reward, and vice versa
If the project has a higher risk, you should risk less, and vice versa
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If an investor sees some asset as an opportunity and his invalidation is basically zero, then he needs to calculate the risk of such asset going to zero or the time it will need to recover
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As you can see there is NO RIGHT WAY to do it. Each of the techniques has pros & cons & each suits a different person
Its not that investing is better than trading and vice versa
But the Risk to Reward tool can help us a lot understand the potential risk & costs for reward
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Its not that investing is better than trading and vice versa
But the Risk to Reward tool can help us a lot understand the potential risk & costs for reward
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One way to highly mitigate the risk is by diversifying
Across markets/pairs/stocks/countries and so forth
But that has costs too. Like managing so many portfolios
The goal of this thread is to give you the idea of RR and to think about its implications for your life
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Across markets/pairs/stocks/countries and so forth
But that has costs too. Like managing so many portfolios
The goal of this thread is to give you the idea of RR and to think about its implications for your life
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As for trading which is my expertise, what I found being the "sweet spot" risk to reward is somewhere around 2-5R
Anything below is not worth the reward, anything above involves too much risk
That said I've seen successful traders with boh higher & lower R
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Anything below is not worth the reward, anything above involves too much risk
That said I've seen successful traders with boh higher & lower R
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But more often than not, those who aim for too much, get too little and those who aim for too little, get a bit of nothing
Hindsight RR is nice but for real trading, 2-5 will do it for you
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Hindsight RR is nice but for real trading, 2-5 will do it for you
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I hope this thread was helpful to you and that it will help you utilize this great tool in your real life
Remember even a jump into a swimming pool uses this
If you found this thread helpful/insightful, please consider writing a comment below and RT. Thank you for your time ๐
Remember even a jump into a swimming pool uses this
If you found this thread helpful/insightful, please consider writing a comment below and RT. Thank you for your time ๐
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