Onyx Trading Education — Risk V Reward Ratio’s By Nick Deflorio
Disclaimer:
This is not financial advice and I am not a financial advisor, this is simply my opinion on the broad topic of risk management within trading and your own research should be conducted, always speak to your financial advisor in regards to trading.
Mastering Risk Management with Onyx Trading Education
Beginning my journey in trading, the allure of finding the “golden ticket” for higher win percentages and increased profits was strong. Like many, I acknowledged the importance of Risk Management and the Risk vs. Reward concept, but they weren’t my primary focus. However, since 2016, a recurring lesson has emerged: the critical importance of risk management, a concept often overlooked by beginners and even experienced traders.
In this comprehensive guide, I aim to share insights from my experiences with Onyx Trading Education, focusing on Risk Management and Risk vs. Reward strategies. These insights are pivotal for anyone looking to thrive in trading, so let’s dive in.
The Essence of Risk Management in Trading
What is Risk Management?
At Onyx Trading Education, we define Risk Management as the set of processes designed to minimize potential financial losses and preserve capital. It’s about controlling what you can in the unpredictable world of trading.
The Core of Risk Management: Understanding Risk
In trading, the one controllable factor is risk: the portion of your capital you’re willing to risk on each trade. This is enforced by a stop-loss order, a crucial tool in implementing your risk limit. It’s vital to understand that risk is not the same as position size. Risk should be a percentage of your account size, based on your risk tolerance.
For instance, with a $1,000 account, risking 2% equates to a $20 risk per trade. This is your risk, not your position size. With a 2% risk strategy, you’d need 50 consecutive losses to deplete your account, a scenario considered moderate risk in the industry.
Risk vs. Reward: The Onyx Trading Education Approach
The Flawed 1:1 Risk to Reward Ratio
Frequently, traders adopt a 1:1 risk to reward ratio, risking a percentage point to gain an equal percentage in reward. However, this approach requires a consistently high win rate above 50% for profitability. At Onyx Trading Education, we advocate a more strategic approach.
The 3:1 Reward Expectancy Rule
We teach a rule-based price trading strategy with a minimum 3:1 reward expectancy. This means aiming for a reward thrice the size of the risk. For example, if your stop-loss is set at 20 pips, the minimum target would be 60 pips. This translates to a 2% risk and a 6% reward scenario. Imagine a coin flip where choosing correctly means tripling your gain compared to your loss. It’s an approach that makes sense and one that we emphasize at Onyx Trading Education.
In Conclusion: The Power of Risk Management
Understanding and implementing effective Risk Management and maximizing Reward Expectancy are crucial in trading. These principles are the foundation of successful trading strategies taught at Onyx Trading Education. We hope this article helps you see the importance of managing risk and focusing on reward expectancy — they are truly keys to success in trading.
Thank you for engaging with Onyx Trading Education. We’re committed to your growth and success in the trading world.
