# Risk Reward Ratio

Risk-Reward Ratio is one of the most important money management concept. Mathematically, it’s the ratio of Risk (Money that could be lost), and Reward (Target Profit) for any particular trade. For Ex: If you are willing to risk 1000 Rupees for a target profit of 2000 Rupees, then your risk reward ratio comes to 1:2. Before adopting any trading strategy, it’s necessary to gauge its risk reward ratio for a long term. Most of the modern trading platforms have risk-reward ratio in their back-testing report.  Risk Reward ratio of 1:2 is considered good for any trading strategy, and anything less than that can vanish your capital in the long term. Check out the below link to calculate Risk-Reward ratio for your trading strategy:

Risk Reward Ratio Calculator

• Never invest more than 5% of your capital in a single trade.
• Diversify your capital into multiple instruments so that loss in one can be compensated through profit in the other.
• For Intraday traders Stoploss should not be more than 1% of your investment, while for Positional it should not be more than 5%.

Hedging is a method to prevent your investments from unforeseen losses. It may not be required for Intraday trading, but is very useful for positional and long-term investments. Especially you should hedge your positions before any major economic events like Budget sessions, RBI meetings etc. Options are very useful instruments to hedge your position. For Ex:- You can sell a Call option or buy a Put option to hedge your Long position in Equity. In this case, even if your Equity position goes into loss, the Options will make some profit and the losses can be minimized. But always remember that you should not over-hedge.

Margin Trading can be a boon for all retail traders if used judiciously. But it also has the potential of blowing off your entire account. Margin Trading is a concept which allows you to buy more securities than what you can buy with capital in hand. It’s like a loan from your broker or exchange. For ex: with a capital of 20000 Rupees you can buy securities worth 100000 Rupees. But the problem here is that 1% loss on 100000 Rupees is equal to 5% loss on the original capital. So you should always avoid excessive Margin Trading. Check out the below article to understand more about Margins.

Dear Sir,
Good Article and Great Initiative for retail customer like us who are very little technical know how.I need a help in AFL with hope that you will help me.Buy when high price trigger of buy signal(Green) bar and sell when low price trigger of sell signal(Red) bar.I am posting here the AFL
_SECTION_BEGIN(“Price”);
SetChartOptions(0,chartShowArrows|chartShowDates);
_N(Title = StrFormat(“{{NAME}} – {{INTERVAL}} {{DATE}} Open %g, Hi %g, Lo %g, Close %g (%.1f%%) {{VALUES}}”, O, H, L, C, SelectedValue( ROC( C, 1 ) ) ));
//Plot( C, “Close”, ParamColor(“Color”, colorDefault ), styleNoTitle | ParamStyle(“Style”) | GetPriceStyle() );
_SECTION_END();
_SECTION_BEGIN(“trend”);
uptrend= Signal(14)MACD(12);
Plot( 2, /* defines the height of the ribbon in percent of pane width */”ribbon”,
IIf( uptrend, colorGreen, IIf( downtrend, colorRed, 0 )), /* choose color */
styleOwnScale|styleArea|styleNoLabel, -0.5, 100 );
SetBarFillColor( IIf( uptrend, colorGreen, colorRed ) );
Plot( C, “Price”, IIf( uptrend, colorGreen, colorRed ), styleCandle );
Sell=downtrend;
Short=Sell;
Sell = ExRem( Sell, Buy );
Short = ExRem( Short, Cover );
Cover = ExRem( Cover, Short );

shape = Buy * shapeUpArrow + Sell * shapeDownArrow;
PlotShapes( shape, IIf( Buy, colorGreen, colorRed ),0, IIf( Buy, Low, High ) );

_SECTION_END();

Dear Sir,
Good Article and Great Initiative for retail customer like us who are very little technical know how.I need a help in AFL with hope that you will help me.Buy when high price trigger of buy signal(Green) bar and sell when low price trigger of sell signal(Red) bar.I am posting here the AFL
_SECTION_BEGIN(“Price”);
SetChartOptions(0,chartShowArrows|chartShowDates);
_N(Title = StrFormat(“{{NAME}} – {{INTERVAL}} {{DATE}} Open %g, Hi %g, Lo %g, Close %g (%.1f%%) {{VALUES}}”, O, H, L, C, SelectedValue( ROC( C, 1 ) ) ));
//Plot( C, “Close”, ParamColor(“Color”, colorDefault ), styleNoTitle | ParamStyle(“Style”) | GetPriceStyle() );
_SECTION_END();
_SECTION_BEGIN(“trend”);
uptrend= Signal(14)MACD(12);
Plot( 2, /* defines the height of the ribbon in percent of pane width */”ribbon”,
IIf( uptrend, colorGreen, IIf( downtrend, colorRed, 0 )), /* choose color */
styleOwnScale|styleArea|styleNoLabel, -0.5, 100 );
SetBarFillColor( IIf( uptrend, colorGreen, colorRed ) );
Plot( C, “Price”, IIf( uptrend, colorGreen, colorRed ), styleCandle );
Sell=downtrend;
Short=Sell;
Sell = ExRem( Sell, Buy );
Short = ExRem( Short, Cover );
Cover = ExRem( Cover, Short );

shape = Buy * shapeUpArrow + Sell * shapeDownArrow;
PlotShapes( shape, IIf( Buy, colorGreen, colorRed ),0, IIf( Buy, Low, High ) );

_SECTION_END();

3. Really very nice article. It has more useful information about risk management factors. Thank you.