Approach to Risk Management

Aim for a 1:2 risk to reward ratio when trading. If you're putting up 1000 bucks, your goal should be nothing less than 2000. If your target doesn’t meet that, skip the trade entirely. It’s not about having a crazy win rate, it’s about making better trades. Keep in mind, risk management isn’t about winning every single trade. It’s about weathering the losses. Ultimately, good risk management helps you stick around for the long haul.

This is just the reason traders are losing. You have $1000 to trade, but you want to use it to have PnL of +1000. That is when the person will think of high leverage when he noticed it is not possible with 1x leverage. And that will be the reason the person may think of shit coins that could be the reason he will lose.

I totally do not agree with the 1:2 RR; that is an unreasonable risk to be taking. That is, you are risking so much for so little. The lowest for me should be a 1:3 RR; anything lower than that is not worth it.

This is what I told to my friends and colleagues who are trying to trade, most of them are focused on different strategies and a lot of indicators and sometimes they missed a good opportunity because they are looking at the perfect setup which is rare. Going back to the topic, I read that even a 40% win rate strategy is effective as long as you have at least 1:2 R:R which what OP is trying to say. I think this is one of the things new traders are needed to understand, for them looking for the right setup is enough but little did they know that strategy alone is not enough to make profit and survive long term in trading.

In my opinion, a 1:3 risk-to-reward ratio is more interesting. Plus, if our analysis is on point, we can usually extend it to at least 1:5

This is also what I have in mind, 1:2 risk reward ratio is not just worth it when you are risking so much, because with such a risk reward ratio you must win more trade for you to be profitable, but if you trade with a risk reward ratio like 1:5, 1:4 or 1:3,  even though you win only four trade out of  ten trade taken, you will still be profitable, that's why I believe that for a trader to win big and be profitable, he needs to be greedy most times, not running away with a  small profit like 1:2 when the trade is playing out as expected.

Can you explain what you mean as 1:3 RR? That means you will risk $1000 to trade and be expecting $3000 interest on it? If that is what you mean, traders that follow your advice will lose high amount of money before he will realize that he is not trading, but gambling. Which coin, fiat, stock or commodity are you trading that is giving you such huge return?

Being greedy is not a problem for traders, as long as the market actually supports it. You also need to determine the win rate percentage for each ratio you set as a target. A 100% win rate profit from a 1:2 ratio is already more than enough. Even achieving a 50% win rate is already good for traders. For example, with $1000 capital, with a 1:2 ratio, achieving just 50% profit is already sufficient. What do you think about a 1:5 ratio? But I know every trader has their own way.

I agree with this approach, but I usually use a reward ratio of 1:2.5. My target is more than 100% of my stake. So, if I successfully execute two positions, the profit can cover three mistakes in opening positions. However, sometimes I don't hesitate to open a trade even with lower odds, such as 1:1.5 because the important thing is that I profit. Honestly, it depends on the market situation. If the situation allows for a higher take profit (TP), I don't hesitate to do so.

Risk management does indeed serve as a safeguard to keep our capital safe from losses we cannot afford. However, risk management is not limited to that alone; it is also used to ensure that we can balance the potential profits we can earn with the amount of risk we can bear or measure. So, the point is that risk management should indeed protect us from major losses. And risk management actually acts as a brake or limit so that we can better control our trading psychology. Therefore, when discussing risk management, it is often paired with emotional management. Because with risk management, we’ve already measured the level of risk we’re taking, so even if the market moves contrary to our expectations, we won’t panic and will remain calm. Because everything is already factored into the risk calculations we’ve established. And actually, risk management isn’t just about preserving capital. It must also reach the stage where we can minimize the risks taken and improve the profit-to-loss ratio.

Having $1000 as capital and risking all that amount to get x2 of that amount is a very bad strategy and you won’t get to stay in the market long as a trader. You can’t risk 100% of your capital on just one trade, the probability of winning the trade even though it is to get a win rate of up to 500% is still not certain 100%. Trades can be lost even with the best technical and fundamental skills put together, so why then risk all your capital on just one trade. Targeting 2:1 on a trade is great but risking all of your capital to target that ratio is very poor risk management approach. As long as your whole capital is not safe and you risk losing them all, then your risk management approach is very bad.

This is not a typical example of risks management and I don't really know what you are trying to prove with these images you have shown us.  This is an example of take profit and take lose. This is like a gamble trying to make little to what you are going to lose to trading. This is not good enough for a trader that knows what he is doing to become profitable. Your take profit supposed to be like 3x plus to what you are going to lose to trading if your strategy does not work out well.

No, I believe the OP was using the $1000 to $2000 as an example to say you should always expect double what you are risking. I am saying a better risk should be 1:3 RR. It is surely bad trading to be risking $1000 on a trade if that is all your capital, even if your capital is slightly higher than $1000. If you have a high risk appetite to be risking such an amount, your trading capital has to be huge. If you have a high risk appetite with small trading capital, your account will be liquidated quickly.

Well, different traders have different risk appetite. If you prefer 1:3 RR then that's perfectly fine. Some traders especially crypto traders prefer it that way because the crypto market is more unpredictable than in Forex markets and even with precious metals. For me, 1:2 is fine because that could cover some of your losses especially if you're in a losing streak. Also, there are some traders who only has 1:1 to 1:1.5 RR, and they have a higher win rate and they're profitable with it. Heck there are some who does negative RR, and they're profitable in it. Bottomline is, as long as it works with you and you're profitable with it then it's still fine. Whether it's 1:1, 1:2 or 1:3 as long as you make money because that's how trading is. You trade to make money, right?

In my book this is not risk management. These RR are meaningless if the market keep going against your trades. Your first image itself implies that you gonna have higher RR when price already going down but it could very well be a dead cat bounce and widening the upside range doesn't mean higher RR, but being desperate. There is reason why buying after dump is like catching falling knives because the perception that the chart might indicate higher RR because price could recover back again is pure illusion. Risk management is not overtrading and oversizing.

You trade with a margin as high as $1000 doesn't mean that you are risking everything in that trade, because you can be willing to lose only $100 dollar from that $1000, by placing your stop loss at $100 dollar, but the key reason why you will see a trader using $1000 to trade instead of that $100 is because it's more better to trade with such a high margin, than trading with only the $100 but with 10x leverage that increases your chances of liquidation. So if a trader is talking about risk to reward ratio, he is talking about the amount he is willing to lose, not his entire margin.

That means the OP is only misleading people into what is very wrong, he supposed to explain better. There is no need to say 2 times more profit should be what traders should be looking for. If a trader is having $10000 in his trading account and he is risking $1000 to trade, he should still use $10000 for the calculation. I mean having $10000 but using 1000 to trade, to make other people understand, your calculations should still be based on $10000 for other traders to understand.

For experienced traders, that is reasonable, or I would say it's a very decent target, because if you can't make more than 100% profit with your trades as an experienced trader, then your experience is basically useless, some might say it's being greedy, but it's really not, because with knowledge and experience, it should be easily achievable, and besides, if you fail in one attempt, or maybe more attempts, but you should at least be able to hit one trade successfully, and all your funds that got wasted in the failed attempts when your stop-loss was getting hit would be covered along with some profits. It sounds like a lot when we say we have to make $1,000 on top of your $1,000 investment, but if we lower the amount, it will seem normal, like if you are risking $10 on a trade, in futures, you should be able to make $10 with it if the market swings in the direction you have made your trade in, similarly, a higher target could also be achieved if your margin balance is high, stop-loss is, however, necessary in every single trade, because you wouldn't want to lose all your invested capital in case the market goes against you.

Somehow I agree with your opinion here since he should use that $10,000 to calculate the risk and rewards they have gotten. Otherwise if they use other thing it can give certain misleading impression and they might released exaggerated profit results on their trades.  Proper way to handle the risk is to show the profits they made on overall capital they have use or deposited and not on those portions they only used. As what you have been discussed so people can understand the real situation happened in their trades.

In the first place, I created this topic so that any community forum members who have been here for a long time can express the definition of risk management that they often say is necessary in trading and yet they do not explain in details how anyone can do it. That is why everyone is here to express their opinion regarding the argument of risk management, we are all entitled to give an opinion. But we do not have the right to judge someone's opinion, instead, let's learn to respect the opinion of others, because we do not have the same experience, strategy, and understanding of risk management, In addition to this, obviously what I did was just an illustration or example only, I did not say that any trader should put in $1000 when he does his actual trade activity. The $1000 margin its just an example it could be $100, $10 and etc. It depends on the capacity of traders, so when you say that it is misleading, where was I misleading? Maybe you just think that your opinion is right, so you are judging my opinion here, I respect your opinion sir, but I hope you will also learn to respect the opinions of others, not to judge just to show that your opinion is right. We are all entitled to give our opinions here and there is nothing wrong with what each of us gives here because we do not all have the same understanding of trading matters.