The figure below reflects the difference between risking a small portion of assets and risking a larger percentage of assets.
Trader risk per transaction 2% vs. 10%
You can see the huge difference between taking a 2% risk and taking a 10% risk. If you take a risk of 10% of the account funds for each transaction, if you suffer a losing streak and lose 19 consecutive transactions, you will change from a starting capital of 20,000 yuan to only 3002 yuan. You will lose 85% of your total account! If you risk only 2%, you still have 13,903 million yuan, and you only lose 30% of the total account.
Of course, the last thing we want is to suffer losses in 19 consecutive trades, but even if you only lose in 5 consecutive trades, look at the difference between taking a 2% risk and taking a 10% risk. If you risk only 2%, you still have 18,447 yuan. If you take a 10% risk, you only have 13,122 yuan left. This is less than the remaining account balance when you are taking a 2% risk and 19 consecutive transactions are damaged.
The figure is intended to tell you that you should set account management rules so that when you continue to lose money, you still have enough funds to continue trading.
Can you imagine that you lost 85% of the total account amount? ! !
Trust us, you don’t want to get into that situation.
The figure below tells you that if you lose a certain percentage of the funds in your account, how much do you have to make back to return to no profit or loss.
In this example, it is not difficult to find that even if you only make a profit in 50% of the transaction, you can still get a profit of 10,000 yuan. Remember that when you trade when the return-to-risk ratio is high, your chances of profiting will be greater, even if your winning ratio is low.
Setting a higher return-to-risk ratio requires a price. On the surface, setting a higher return-to-risk ratio is a good idea, but think about the situation when it is applied in a real situation.
Suppose you are a short-term trader and you only want to take a risk of 3 points. With a 3:1 profit-to-risk ratio, you should get 9 points. Your chances of making a profit are small because you have to pay the spread.
If the spread provided by your broker is 2 points, then you will have to make a profit of 11 points, so you have to accept a 4:1 profit-to-risk ratio. But the euro/dollar exchange rate will fluctuate by 3 points within a few seconds. You can stop the loss before you can finish the word “uncle”.
If you reduce the size of your position, you can expand your stop loss to maintain an ideal return-to-risk ratio. If you increase your points and you want to risk 50 points, you need to make a profit of 153 points. In this way, your profit-to-risk ratio will be close to 3:1. Not so bad, right?
In the real situation, the return to risk ratio is not static. They must be adjusted according to the time frame, market environment and your entry/exit position. The return-to-risk ratio of position trading can be as high as 10:1, while the return-to-risk ratio of ultra-short-term trading is as low as 0.7:1.