#币圈 Discussion: What is the Risk-Reward Ratio in Trading? #比特币 #ETH
The risk-reward ratio, as the name suggests, is the ratio of the planned take-profit distance to the stop-loss distance in each trade, which we refer to as the risk-reward ratio. Suppose in a trade, we plan as follows: if the position loses 10%, I will stop loss, and if the position gains 30%, I will take profit—then at this point, the risk-reward ratio for this trade is 3:1.
Trading according to a certain risk-reward ratio is a very important and fundamental way of thinking for a trader. However, in reality, 80% of traders do not have this awareness of the risk-reward ratio. Most people enter the market without a specific take-profit and stop-loss plan; they either hold on to their losing positions or take profits too early, leading to small gains or large losses. Over time, the final trading outcome will be difficult to watch. Only by establishing an awareness of the risk-reward ratio in trading, making a take-profit and stop-loss plan before each trade, and ensuring that each trade's risk-reward ratio is greater than 1:1 can we avoid the situation of making small gains and large losses. At this point, we can consider ourselves to have entered the realm of trading, with the possibility of achieving stable profits.
So, to delve deeper, what methods can we use in trading to increase our risk-reward ratio and obtain greater returns with a small cost? Generally speaking, there are two ways to improve the risk-reward ratio: 1. Use a narrower stop-loss space. 2. Use a larger profit space. If you want to use the first method, that is, to expand the risk-reward ratio by narrowing the stop-loss range, you need to ensure that the market's volatility is low at this time, and the market movement is relatively smooth, without significant pullbacks. Only in such a market can your narrow stop-loss be safe and not be swept out by market fluctuations. If you want to achieve an expanded risk-reward ratio through the second approach, you must ensure that the market trend environment is very clear, usually when there is still a same-direction trend on a larger time frame, only then can you obtain a larger profit space.
In summary, awareness of the risk-reward ratio is very important for traders. It is like the rifle in the hands of a soldier; it is an essential presence that must never be let go of.
