The Crucial Nature of Risk Management | Risk-Reward > Win Rate

4 juin

Within financial markets, the crucial thing to bear in mind is the need for reliance on proper risk management, and the prioritisation of the 'risk-reward' mechanism over the notion of 'win rate'. By risking only 1% of our total trading capital per trade and refraining from putting all eggs in the same basket, we are retaining consistent profitability in the long run through the law of big numbers and with the aid of the 'risk-reward' principle.

As it could be inferred from the illustration, by risking only 1% of the total capital per trade, with an average of 1:3 risk-reward and a win rate of 40%, it is possible to generate a return of +4% by executing eight trade positions only.