I wanted to write about this as i had a couple questions on it today. I often tell my students that i personally train that the best money makers out there arent the greatest stockpickers but the best managers of risk. My mentor paul singh used to say that nonstop in his emails to me. As a trader thats your first job as very few people are great stock pickers. for years I was a terrible terrible trader but i got by because I was a natural stock picker. I could hit such boomers that geting the perfect price, exit, stop loss didnt matter as much as there was a big margin of error. But overtime my results plateud as I was taking 5 steps forward 4 steps back and i wasnt using good risk/position managment. Those are the 2 things that seperate traders from elite traders.
I try to always find stocks that give me a 2:1 ratio and 3:1 is amazing. What that means is for every unit i risk (dollar or penny whatever) i have a potential reward of 2. So if im taking a trade and my stop is 10 cents my target better be 20 cents.
New traders and probaly 90% plus of the traders you see on twitter and eveywhere else are the opposite. They will set a loose stop so that they dont get shaken out or have to sell their position. Then the second they see some green and are up 5 cents 10 cents– 1 % or 3% whatever.. they take the profit! they see green and they take it with no regard if the trade was even worth it depending on what they risked.
a memeber sent me an email today asking why i held $neop overnight without selling a single share when the market got basted yesterday. He wanted to know why i didnt take the cash. The simple reason was reward to risk ratio.
I entered NEOP at 4.15 in chatroom. My stop was a bit under the 20dma so i was risking 17 cents. I had seen next level of major resistance in the 4.5s so this gives me a potential for 30-40 cents return for 17 cents risk. This is one of 3 or 4 reasons i held it overnight. To get a 2: 1 reward to risk ratio I had to have a target of at least 4.45. i SOLD MY FIRST 1/2 shares at 4.49 today for 7% gain. Now if my stop had been tighter then my target could have been less. Even though it would ahve been nice to take some profits at 4.3 or 4.35 I know that if i shortchange my r/r ratio’s overtime to less then 2:1 it will be very hard for me to make huge huge exponential returns as now I have to become and stay an amazing stock picker and hit a higher ratio of traders 70-80% winners. Where if you see guys like foustockpicks or johnwelshphd they make hundreds of thousands of dollars a year trading but they both only bat 50% on average for their win ratio. The reason is the r/r ratios
NOW DO AN EXERCISE AND U WILL SEE WHY THIS IS SO IMPORTANT
If you manage risk at a 2:1 ratio (not taking into account that some of your boomers will be much higher than 2:1 by scaling out. Often on swings like blti, redf, sify i get 10 to1!!!!!!!!!!!!!!), you only need to be correct 35 percent of the time to make money. Let’s say you make 1000 trades over the year. 350 trades make $2000. 650 trades lose $1000. You have made $50000 ($700000-650000)
see now u ahve made ursefl at least a lower middle class living! now do this! imagine if you can raise that hit ratio to 50% HOW MUCH U MAKE???????????????????????????????????????? GOOD MONEY
now imagine if your like @urbanryno my partner who in march hit 80% of his trades and always uses 2:1 ratio. how much u think he makes! big f-u- money