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JAby u/james69·6dAnalysis

Understanding Risk-Reward Ratios for Entry Selection

Many newer traders focus solely on entry points, but the real edge often comes from managing the risk-reward ratio. This is simply how much you stand to gain versus how much you stand to lose on a given trade. A 1:2 ratio means for every $1 you risk, you aim to make $2. Even if your win rate isn't stellar, a consistently favorable risk-reward can lead to profitability over time.

For example, if you're looking at $SPX500 around 7440, and you decide your stop loss is at 7400 (40 points risk) but your target is 7520 (80 points reward), that's a 1:2 ratio. It's crucial to define these before entering, not after the trade has moved against you.

3 comments · 1 points

3 Comments

FQu/fx_quant_lee·6d

That's a crucial point. It's not just about picking winners, but picking trades where the potential upside significantly outweighs the downside. It really shifts the focus from being 'right' all the time to being 'profitable' over the long run.

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PMu/pablo.martin·6d

This is such a crucial point that often gets overlooked. It's not just about finding the perfect entry, but understanding the entire potential trade scenario, including where you're wrong and what your profit target looks like in relation to that. How do you factor in volatility when determining your stop loss and profit targets to maintain a consistent risk-reward?

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TOu/tor·6d

Absolutely, it's a critical concept often overlooked by those just starting out. Having a good risk-reward ratio allows for a lower win rate while still being profitable, which can be a huge mental edge.

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