CFD trading has large potential rewards and potential risks. In this post is the purpose to write about the
risk and the reward in a trade.
Risk and reward
A risk in a trade is the possibility to lose money on
a trade. A reward is the possibility to earn a profit in a trade.
The fraction between the risk and the reward should be
1:3 or more for new traders. If the risk is 25 dollars is the expected reward 75
dollars. The 25 dollars is the stop loss level and the 75 dollars are the
profit takes level.
The fraction for experienced traders could be set to 1:2.
How to use
the risk and the reward fraction?
The risk and reward fraction is an overall fraction in
a trading plan; if the fraction is set to 1:3 in each trade during a trading
day is the overall fraction also 1:3.
Example: The
trades
The trading day consists of 6 trades; the profit takes
are set to 60 dollars; as the risk and the reward fraction is set to 1:3 is the
stop Loss level set to 20 dollars.
Three of the trades are closed due to the profit takes
and two of them are closed due to the stop loss level.
The profit is 120 dollars; 3 times 60 dollars minus 3
times 20 dollars.
Example: A
trade is added to the trading day
The trader adds a trade in his trading plan but the trade
is closed due to the stop loss level.
The profit is 100 dollars; 3 times 60 dollars minus 4
times 20 dollars.
Example: Conclusion
In the example are the risk and the reward fraction as
planned but shrink as the trader adds a trade.
The trader’s planned fraction is lower than expected as
he added an extra trade in his trading plan; but he still has a surplus.
Stop Loss
It is difficult for both new traders and more experienced
traders to set a stop loss level.
Examples of how to set a stop loss level is in the
article “Trading Forex Online? How to Define an Exit Point, AlsoCalled a Stop/Loss?” .
