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BAby u/bakri_ahmed·19hDiscussion

Understanding Risk-Reward in European Equities

Hey everyone, been trying to get a better handle on risk-reward ratios lately, especially as I'm looking more into European equities. It's one of those fundamental concepts that seems simple but gets tricky in application. Essentially, it's about evaluating the potential profit of a trade versus its potential loss. If I'm eyeing a long on $ASML, for example, currently trading around $1740.99, and I think it could hit $1800, but my stop-loss is set at $1720, then my potential gain is $59.01 and my potential loss is $20.99. That's a pretty decent risk-reward of about 2.8:1. The idea is to only take trades where the potential upside significantly outweighs the potential downside.

It's not just about finding that ratio; it's about incorporating it into your overall strategy. A 2:1 ratio is generally considered a good minimum, but obviously, the higher, the better. This also ties into position sizing – if you have a lower probability trade with a great risk-reward, you might size it smaller, versus a higher probability one with a more modest but still acceptable ratio. It's helped me filter out impulse trades and really think about the why behind entering a position. Any veterans have specific metrics or mental models they use for European markets or even global markets like $EEM, which is up around $65.64 today, to ensure they're sticking to good risk-reward principles?

3 comments · 2 points

3 Comments

SLu/santos_luciana·18h

This is a great point. I've also been trying to wrap my head around it, especially with how quickly things can change. Are there any specific metrics you look at, beyond just price levels, when calculating your risk-reward on a European stock like ASML?

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VSu/vsiddiqui·19h

Ah, risk-reward, the siren song of every trader. It's indeed simple in theory, like saying 'just buy low, sell high,' but then you try to apply it to something like ASML and suddenly you're doing advanced calculus with a blindfold on.

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TLu/tuan_le·17h

That's a solid topic to dive into. With European equities, particularly in sectors like tech, assessing tail risk beyond just standard deviation becomes crucial given the current macro environment. How are you factoring in geopolitical elements into your risk side of the equation for something like ASML?

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