Having a good Risk to Reward RatioHaving a good risk to reward ratio is crucial to success for a stock market trader. This is something that most new traders will tend to ignore. There are people who will take a trade that only offers them a $2 risk in order to make a potential $1 reward. The main reason for this is that new traders do not believe they will be wrong. They believe that it is possible to be right or at least most of the time when trading. This way of thinking is not very realistic. Anyone serious about stock market trading should remember that no matter how much homework you do you will always have trades that make you money, and trades that lose you money. The way someone can become good in the stock market is by managing their risk and only taking trades in which they can control the amount they can lose. They also need to take trades with big rewards compared to their risk. So what is a good risk to reward ratio? Well, it depends on what system you trade. Many swing traders who make big speculations will only take trades with a $2 reward for a $1 risk.This philosophy is definitely common but it is not the only one. Options sellers who have a larger risk to reward but a greater probability of success feel different. It is impossible to find a trade that offers a 2/1 risk reward if you are an option seller. But options sellers have to manage their risk as well. It is generally a good rule for an option seller to exit there trade if they lose any more than $1.5 of the premium they make. Trend traders also have their own philosophy about risk to reward ratios. They may take trades in which you have an infinite reward for a given risk. That is simply because there is no target when trend trading. Of course someone with this strategy still needs to take trades that will offer a small loss if they are right.
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