Trading Expert Belal Dalal Shares Risk/Reward Secrets
Traders are honing in on risk/reward ratios to refine their strategies. Belal Dalal, author of 'The Ultimate Trading Risk Management Guide', shares insights on this pivotal aspect.
Dalal explains that for backtesting, the risk/reward ratio is determined by comparing average losing trade sizes to winning trade sizes. A trailing stop can amplify rewards by risking open profits and exiting only when price reverses.
Patience is crucial with winning trades, while being swift to exit losing ones helps cultivate a favorable risk/reward ratio. Discretionary traders can evaluate a trade's viability by comparing their stop loss to profit target. The higher the potential reward versus risk, the lower the winning percentage needed for profitability. Generally, a trade is only viable if the risk/reward ratio is at least 1:2 or 1:3.
Dalal's guide underscores the significance of setting a stop loss at a level indicating a trade isn't working, exiting while losses are small. The reward should always be a multiple of the stop loss for long-term profitability. A profit target is the price level where price is likely to go if the trade is a winner, further bolstering the risk/reward ratio.
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