Reblog: How To Use The Reward Risk Ratio Like A Professional

The reward to risk ratio (RRR, or reward:risk ratio) is maybe the most important metric in trading and a trader who understands the RRR can improve his chances of becoming profitable.

A trader who uses the RRR incorrectly will never become profitable on the other hand. In this article, I will show you what you need to know about the RRR.

Busting myths around the reward:risk ratio

Let’s first tackle some of the common misconceptions about the RRR to help you understand what most people get wrong before then diving into the specifics of the RRR.

Myth 1: The reward:risk ratio is useless

You often read that traders say the reward-risk ratio is useless which couldn’t be further from the truth. When you use the RRR in combination with other trading metrics (such as winrate), it quickly becomes one of the most powerful trading tools.

Without knowing the reward:risk ratio of a single trade, it is literally impossible to trade profitably and you’ll soon learn why.

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Reblog: 10 Things You Need To Know About Risk, Risk Management And Trading

I will start this piece by saying that I am not bullish or bearish, I don’t make market calls, or predictions and I don’t have opinions about the markets that I trade. I just follow my process, which is based on risk management, money management, price and moving averages. I lead off with this statement so that readers do not think that I am making some type of a market call by talking about risk management and downside protection while we are at all-time highs. I follow core concepts:

Respect price, respect risk and always be prepared for any outcome. 

With Global markets at or near all-time highs, and the money flowing in for many, now seemed to be an opportune time to remind ourselves that every day is a good day to focus on risk management. All of the greatest traders, Soros, Druckenmiller, Tudor Jones and Kovner, to name just a few, have a laser-like focus on capital preservation and risk management. They have all publicly stated that risk management and their ability to cut losses short is the cornerstone of their success. Paul Tudor Jones, a Billionaire Trader, is frequently the most quoted and has said:

“…at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.”

“Don’t focus on making money; focus on protecting what you have.”

“I am always thinking about losing money as opposed to making money.”

Bruce Kovner, another Billionaire Trader, said in Market Wizards: “First, I would say that risk management is the most important thing to be well understood”.

With that being said, here are 10 key concepts regarding risk management that I focus on:

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Reblog: Profitable Trading Explained

If you have a winning system with the right risk management you can still fail to be profitable if you do not have the right trading psychology to trade it with discipline.

If you have a winning system with the right trading psychology you can still fail to be profitable by blowing up during a losing streak without the right position sizing and risk management.

If you have the right risk management and trading psychology you can still fail to be profitable because you are trading with no edge because you don’t have a winning trading system.

Profitable trading requires three dynamics: a winning price action trading system with an edge, proper position sizing with risk management, along with the right trading psychology to allow you to trade your process with discipline.

The original post is authored by Steve Burns of and is available here.

Reblog: Trading Limits – You Have to Start Thinking about the money

trading limits

Good traders are known to be masters of risk management. Risk management includes following a detailed trading plan, setting stop and limit orders and managing traders without succumbing to emotions.

Good traders also tend to follow a robust trading plan that focuses more on ensuring that the traders do not lose their capital, while the profits are seen as only secondary. As part of this pursuit in achieving trading excellence, professional and seasoned traders follow the concept of setting limits on their losses, on a daily, weekly and even monthly basis.

Trading with limits ensures that the traders do not end up sabotaging themselves in the heat of the moment as emotions can often override logic when a trade turns into a loss.

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Reblog: The Importance Of Time Horizons For Investing (And Beyond)

The Importance of Time Horizons

 When it comes to evaluating market risk, your time horizon is a key factor to consider. As a general rule, shorter time horizons require more caution than do longer ones. I would also argue, however, that this concept applies to many areas of investing—and beyond.

Long-term investing

Let’s start with why longer-term results can be more predictable than shorter-term ones. The answer is, simply, averaging. One data point might be noisy, but as you accumulate more and average them, the outliers tend to offset each other. As a result, the signal starts to dominate the noise. The more data points you have, the closer you get to the expected result. Investors with 40 years, for example, can look at longer-term return goals with a reasonable expectation of actually getting them. But for shorter time frames, the noise can dominate. Hence, the extra caution needed as you get closer to retirement.

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Reblog: Why You Should Take the Profits and Run!

This article is for those traders (new or experienced) who have trouble booking profits. Do you often see large profits evaporate as the market reverses against you, leaving you feeling powerless and confused? If so, you know how frustrating it can be and you know exactly what I’m talking about.

Poor target placement, lack of experience, greed, arrogance and stubbornness are all issues that can cause traders to not take profits off the table.

I appreciate this article may conflict with some of my core beliefs and teachings on taking profits since typically I encourage people to aim for a 2 to 1 risk reward or greater and to set and forget stops and targets. In theory, this makes sense, but in the real world, as you likely already know, there are still a great number of trades that almost hit your profit target or where a trade has moved quickly in the right direction and you’re staring at a giant profit… and then the next day or week, the market goes the other way and your once giant profit has become a much smaller profit or even a loss.

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Reblog – Getting to Zero: Value and Risk Management

Why it’s valuable to calculate how your investment price can go to zero

Any time you manage other people’s money, risk management should be defined as preventing the permanent impairment of capital. Nothing can be riskier to an equity investor than losing all your money. Anybody who loses sight of this is – quite frankly – both a terrible fiduciary steward and value investor.” – Duncan Farquhar

In a recent article, Science of Hitting discussed the difficulty in adding to your position after Mr. Market plays havoc on the stock’s price and valuation. Making the decision to double down is tough for several reasons.

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Reblog: Why Artificial Intelligence is a Game Changer for Risk Management

This article reinforces our belief that social media information coupled with artificial intelligence helps predict the stock market behaviour. And this is the very premise on which StockArchitect came into being.

The original post is written by Stacy O’Neil Jackson, Market Leader, Regulatory, Forensics & Compliance at Deloitte Services LP and is available here.


The idea of computers outsmarting and replacing humans has existed in movies and books for decades. Fortunately, that hasn’t happened on a wide scale yet. But what has happened is the recent emergence of artificial intelligence concepts – specifically cognitive computing – which involve advanced technology platforms that can address complex situations that are characterized by ambiguity and uncertainty.  Cognitive computing has begun to augment and empower business decisions right alongside human thought process and traditional analytics. In fact, the domain of risk management, lends itself particularly well to cognitive computing capabilities, as typical risk issues often include unlikely and / or ambiguous events.

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