The RRR of Stock Trading!. The Three Rs Every Stock Trader Must… | by Sriram Balasubramanian | April 2022
The three Rs every stock trader should know.
Triple Rs (or) RRR – is an Indian film which according to the media is a blockbuster, and therefore, it is also on my watch list. RRR – apparently stands for Rise, Roar and Revolt. Now don’t get me wrong here – I’m not writing a movie review or promoting the movie as a must-watch.
As well said, RRR is:
- RRthe returns
- RRmeet again
For stock traders, RRR also means Risk/return ratio.
Let’s understand it RRRs with a practical example of the WIBE dynamic trading strategy.
We swapped Blue Star Ltd on March-29-2022. If you want to know more about trade setup and explanations, feel free to access it here – BLUE STAR LTD.
Let’s understand RRR by exploring BLUE STAR as an example.
Risk: In stock trading, risk is the possibility that the investments you have chosen may fail to produce the expected results. This could mean getting returns below expectations or losing your initial investment – and in some forms of trading it can even mean a loss that exceeds your deposit (derivatives).
In the case of the scholarship Blue Star Ltd, we assumed a risk of 5% of trading capital. If the capital traded is INR 25,000, a stop loss of 5% means INR 1,250. If the trade fails, the maximum loss is 5% of INR 25,000, INR 1,250.
Return / Reward: In the context of stock trading, the reward is the potential that the investments you have chosen will succeed in producing the desired results. In the case of the scholarship Blue Star Ltd, we risked 5% of the capital traded for a gain of 10%. If the traded capital is INR 25,000, an anticipated gain of 10% means a profit of INR 2,500.
Risk/reward ratio: The reward/risk ratio (RRR, or Reward Risk Ratio) is the most critical metric in trading. A trader who understands RRR can improve their chances of becoming profitable. The Reward Risk Ratio measures the distance between your entry and your stop loss and take profit order and then compares the two distances. The distance between your entry and your stop-loss is 50 points, and the distance between the entry and your profit is 100 points.
Then the reward risk ratio is 2:1 because 100/50 = 2.
Reward risk ratio formula:
RRR = (Take Profit — Entry) / (Entry — Stop loss)
In the case of the scholarship Blue Star Ltd, we risked 5% of the capital traded for a gain of 10%. If the capital traded is INR 25,000, an anticipated gain of 10% means a profit of INR 2,500 at a risk of INR 1,250.
Reward risk ratio = 2,500 / 1,250 = 2
Traders generally aim for a risk/reward ratio of 1:3 so they can have some leeway on lower win rates.
In the case of Blue Star Ltd — we assumed a risk of 5% (stop loss), expecting a gain of 10% (a risk/reward ratio of 2)
Review: Once a trader enters one or more positions, it is essential to continue monitoring the progress of trades. A trader may not have too many positions open at any given time to eliminate distractions and reduce risk without overexposure. Some professional traders may hedge their portfolios if the capital traded is large. Traders typically maintain a trade log that captures all position details, including rationale and lessons learned from a failed position.
When it comes to the WIBE Dynamic Trading Strategya typical trade lasts five to ten trading days (swing trading), and therefore monitoring positions does not take as much time as day traders.
I hope you enjoyed the explanation and practical application of RRR. Share your thoughts on trading strategy or any advanced techniques.
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Exercise due diligence if or when placing a trade. All ideas expressed here are my own and do not represent trading or investment advice.
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