Profit To Loss Ratio: Essential Tool To Make A Living In The Stock Market

Profit To Loss Ratio: Essential Tool To Make A Living In The Stock Market

Did you know that you are able to profit and make a living whilst trading in the stock market by being wrong more often than not? Yes, this is possible and still not complicated to understand why. The secret lies on the profit/loss ratio that your trades have. The higher your ratio is, the more you will be able to be wrong and still come out with a net profit.

Profit/loss ratio

This ratio indicates how much you expect to win if everything goes according to plan divided by how much you expect to lose in the event that things start to look ugly. Always try to have at least a 3 to 1 profit/loss ratio. Even more if you can. For example, a 5 to 1 ratio will enable you to be wrong 5 times out of 6 and still breakeven. That means that if you are right only 20% of the time, you might still be able to profit.

Keep in mind that although this ratio is extremely useful and will enable you to enhance your performance in the stock market, it not as easy as that to follow that ratio. For example, at one particular trade you might decide to end things sooner since you want to lock in the profit that you have already made and the stock has just started to plummet. In this trade you might have only won 2 times your initial loss thus making a different ratio. But do not worry, this will be common and what it matters at the end is the average.

Better evaluation of your trades

Also, this ratio will start you with a solid foundation on to choose which trades you want to take. You will be able to better evaluate a trade and see if its profit/loss ratio still makes a valid and good trade or if it should be left alone and move to the next one. Other trade might seem like a good one but it has a resistance nearby that you believe the stock will not break thus reducing your ratio and making you let it go.

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