CRV: What is the risk to reward ratio when Trading

In the Trading part of it to the business that not only profits will be available, but also losses occur. To just the beginning of a traders career, usually a f

CRV: What is the risk to reward ratio when Trading

In the Trading part of it to the business that not only profits will be available, but also losses occur. To just the beginning of a traders career, usually a few setbacks are acceptable until a more suitable and successful trading is found style. But the trading account is not plugged in from the beginning, in the red, is a concrete risk-Management is essential.

Within the trading, it is important that his Chance versus the risk of the Position to be weighed. With the knowledge of the initial risk associated with the opening of the Position, and the fixed potential profit is an essential core element of risk management, you can specify: the opportunity-risk ratio (CRV).

What is the opportunity-risk ratio (CRV)?

The risk to reward ratio is a Central measure for each investment decision. It is the ratio of expected profit (Chance) describes the potential loss (risk). When you enter a Position, connect to an expectation of profit (target price), on the other hand, you may suffer losses and losses. This loss-limit rule, by a stop. The difference between the entry price and the target price defines the Chance of the difference between the entry price and the stop-loss stop the risk. The formula for the CRV is:

CRV = (target price - purchase price) / (buy price - stop price)

this formula must be taken with a view to the possible gains assumptions. The amount of the losses, however, in the context of risk and Money management, a relatively precise set. For this you need to answer in advance of a trade, a few questions:

  • What is my time horizon?
  • How a risk-aware am I?
  • How well I think it is to hold positions that are in profit or loss?
  • Where do I place my stop-in case the Setup fails?
  • Where do I place my exit in case the Setup succeeds?

you Have set these parameters for your Trade, then it goes to reach a passable CRV. In General, it is recommended that only transactions in which the CRV is at least 1.5:1 to 3:1. In this case, your chances of winning the 1.5 -, or three times the risk.

Also, you can see from the Chance-risk ratio, when a Trade is useful, and when not to. If you know from the outset that you get less, than you risk, then the investment makes no sense.

R-multiples: measure for orientation

For better understanding, we have prepared an example (see image): A Trader buys the stock of X to 100 Euro and continues its stop at 95 Euro. The initial risk is 5 Euro. The winning goal he sets for 120 Euro, which corresponds to a Chance of 20 euros. The CRV is according to 4:1 (20 / 5).

In this context, we can also introduce the concept of R-multiples. The R-multiple of the profit or loss of a trade Relative to each received entry is the risk. Our example of Trade reached the profit target, which leads to an R-multiple of four (Trade-profit / risk = 20 / 5). The Trade would be stop, though, is the R-multiple, but minus one (-5 / 5).

by Using the characteristic number you can see at a glance how often the position risk earned or lost in order to pull in the post-processing of the corresponding conclusions. The strategy of a trader can, for example, that he always wants to achieve an R-multiple of at least two, and thus always twice the risk deserves.

The right way of dealing with the CRV

The Problem with the CRV is that you can estimate the chance of winning only – other than the risk that your fixed Stop-Loss before the Trade-the beginning is defined. An estimate of power of this measure, however, very vulnerable, because the question is, how realistic is it really that the share price reaches the target price ensures? This question cannot be answered for sure, but is, rather, based on experience. Here, too, statistical means can be used to determine the Chance as well as possible. Has moved, for example, a share since the beginning of the year is already 30 percent from Deep after the top, and you know from an investigation that in the past, the range of fluctuation was within a year, rarely more than 40 percent, so you can determine the current Chance with a gain of ten percent. Also Central supports or Resistances can be used for the determination of the Chance.

it makes no sense to choose a destination that is in close proximity to the entry point, just to achieve a quick profit. In this case, the hit rate increases, but a greater loss can make many small gains offset. The Combination of hit rate and CRV: the higher the CRV, the lower the hit ratio and Vice versa is shown.

conclusion: The CRV is the key size in Trading

The CRV is an absolute key size in Trading. Depending on how the Trader risks, hedges, and gains realized, this has considerable influence. You should always answer the questions, on what time frame you are trading, as risk appetite is and whether you can stand it, to let Trades a long time to run. Consequently, as you develop your trading strategy in Detail old. Since the CRV is not a static condition, but a very dynamic indicator, it changes during the course of the Trades permanently. An exclusive focus on the CRV seems to not make sense. A strategy with a very low Profit per Trade can make a profit if only a few losses incurred.

*The contribution of "opportunity-to-risk ratio (CRV)" will be released by TRADERS. Contact with the executives here.

Updated Date: 21 July 2020, 10:27

You need to login to comment.

Please register or login.