Why Risk Reward is Bologna

A quick call turned into two hours on Saturday.

I hooked up with an old trader friend over coffee for a virtual hangout. We covered every topic imaginable but what I wanted to share today will have the most impact. The subject of risk/reward ratios came up and we both laughed.

Since we’re both around new traders and like to mentor, we hear this “golden ratio” thrown around by newbies. Yes it’s important but most traders pull the numbers out of their ass, They pick a risk of one and project a profit of three.

But that’s not why we laughed.

We laughed because the magic 3-1 ratio is worthless without probability on your side. In other words the odds of hitting the 3 are greater than the odds of hitting the one. So many traders focus on all this other garbage, chasing shiny objects, new technology, new alert platforms but the primary focus should be developing an edge,

Think about it. How much fear, hesitation of doubt would you have as a trader if the odds of making money were strong? Fear would disappear. There would be no doubt if you “knew” you would make money over time.

Don’t get caught up in technology, or worry about algorithms. Focus on building an argument for great ideas. Ideas that have a strong probability. Only then, will risk/reward matter.

Pete

New swing trade setup today in NVDA. Solid decline and two hammer candlesticks pulling into support. Looking to start building a new long position.