Risk Reward Vs. Probability Of Profit
Lets examine those statements and see how you should put them in context and consider other parameters as well. We will use vertical spread strategy as an example.
Lets take a look at the following trade:
Sell to open RUT August 1175 call
Buy to open RUT August 1185 call
This is the risk profile of the trade:
As we can see, we are risking $822 to make $177. This is pretty bad risk reward. However, the picture looks a lot be
How many times did you hear the following claims:
- "Our system has 90% success ratio".
- "Our trades have 1 to 4 risk reward".
- “Always keep your reward to risk ratio greater than 1”
- “Only take trades with a minimum of a 2:1 reward to risk ratio”
- “If you aim for more than you risk, then you will make money.”
