The calculation of risk/reward is very easy. You simply divide your net profit (the reward) by the price of your maximum risk.
You notice that XYZ stock is trading at Rs100 & after doing your analysis –you are sure that it shall move to Rs140 & you can take profit of Rs40 per share.
You have Rs 1000 for Investment so you go ahead & buy 10 shares of the stock using your complete investment amount (10 shares bought at Rs 100 = Total Investment =10 * 100 =Rs 1000)
Let us assume stock price goes below 100 at which you bought 10 shares – will you wait for your complete investment of Rs 1000 to get wiped out then there is a serious problem because you start hoping & have a big problem that is emotions.
So, I always suggest before you start trading –learn the art of controlling your emotions which is your biggest enemy in the trading world.
Next step is Risk Management (Determine Ruin Point else you will become Hugo Lloris )
Going below buying price Rs100 –till what levels are you ready to hold & take the risk which you need to determine – I am sure no one in the trading community as discussed above will wait for complete investment to be wiped out if that is case keep a check on emotions –go back to square one and by chance if anyone is even ready to take the chance of complete investment as risk amount =Rs 1000- Don’t you think you should try your luck with lotteries –reason is why most are not ready to lose complete amount which happens in case of lottery is because the probability of winning millions of rupees is very less or even negligent in case of lotteries.
Let us calculate Risk Reward where you are ready to lose all your investment amount = Rs1000
Risk = Rs1000
Reward = Rs40 as you expected that stock will go up above Rs100 to Rs140 where you will cash in- Total profit = Rs40 * 10 shares bought= Rs400
(Check the formula at start)
Risk/Reward = 400/1000 = 0.4 – What? Are you crazy –you seriously have to check your emotions?
You have strict stop loss of 10 points – determined by you what may be the case – Do not overtrade as that is the recipe for disaster.
So, now you have decided that if stock price falls to 90 & below –I shall close my position taking the loss.
Here Risk = Rs10 per share
Total Risk = 10*10 = Rs100 (As you bought 10 shares )
Reward = Rs40 per share
Total Reward = 40*10 = Rs400
Risk/Reward = 400/100 = 4
Every good investor has a stop-loss, or a price on the downside that limits their risk.
As someone said take care of your losses & profit will take care of itself.
We have yet again in 28350-28375 zone - holding that zone we most likely see the correction to 27925-27950 zone - Going below 27900 for 27775-27800- Finally below 27750 for 27350-27400
If it fails to hold 27300 then we look for 26950-27000
Most Critical Level - 26050 - Our previous rally started for almost 2000 points giving us risk reward as 5 - risk of 400 points & gain of 2000 points
Previous Update - Bank Nifty - Can the Bull Race Start - Injury Level 25980
What a move from 26060 to 27165 - Above 27165 -Double Top breaks
Last Update - BankNifty - Up Up & Away -1100 - We forget they don't forget 27165
Would love to have your comments & Thanks for reading.
Look the bounce from 27750 - Low for the opening session at 27753 - Isn't this Ooh la la
As per the update above - we expected further down only below 27750 levels
First Installment Done in BOB Deposits along with Bank Nifty -Ooh la la jump from 27750 - Hot trade of the day!
BOB - Bank Baroda Updated for push or jump upside from 144 -148 levelllllllllllllllls - Isn't that great.
Most of the Private Sector & PSU banks have jumped in opening session for the day.
Happy Independence !