Stock Market Basics to Advance : Lecture 11
Risk to Reward Ratio
This is the most important topic in trading
because many of us lagging to maintain proper risk management which causes huge
losses. Make one thing very clear in your mind; losses are part of game, but
how longer losses we have to take it’s in our hand. If your analysis doesn’t work
then accept it and cut the trade otherwise there are chances of capital wipe
out also.
Treat trading as business where
no place to emotions. If your business doesn’t work then accept it and start
something new, same phycology is used in trading also. Before entering into
trade first decide, how much there will be stop loss point.
There are three prices; we have to take in
mind
o Stop loss price
o Buying Price
o Target Price
Eg. 1
10 20 30
(Stop
Loss) (Buying Price) (Target Price)
Let’s assume, if you’re buying price is 20 then you put Rs 10 as stop
loss and Rs 30 as target.
Means you’re risk to reward ratio will be
1:1.
20-10 :
30 -20
10 :
10
1 : 1
Eg 2
10 20 40
(Stop
Loss) (Buying Price) (Target Price)
Let’s assume, if you’re buying price is 20 then you put Rs 10 as stop
loss and Rs 40 as target.
Means you’re risk to reward ratio will be
1:2.
20-10 :
40 -20
10 : 20
1 : 2
Stop-loss
Selection method:
- To decide stop loss, first see nearer support or resistance on chart pattern. Depending upon, trader’s risk stop loss can varies.
- In Equity, 0.5 to 0.9 % is a standard stop loss on stock price.
- When market is not volatile then use stoploss as 0.5% only.
Eg,
1. If Tata Motors price is 1000 then stop loss will be 5 to 9 Rs.
2. If Reliance stock is trading at 3000 then its stop loss range between 15 to 27 Rs.
Margin
:
Leverage = Stock Price /
Approximate required margin
Leverage ( Margin in terms of 100%)
2X
50%
3X
33%
4X
25%
5X 20 %
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