Welcome to Investing

Lessons 3: Risk and Reward of Investing

Risk and Reward of Investing

 

What is Risk and Reward?

Risk and reward, also known as the loss (Risk) and the take profit (Reward) from trading and investment that you will receive.

 

Risk and Reward is a method to help you systematically plan your trading strategy in asset investment. It aims to hedge and be able to predict how much or how little the asset is worth investing.

 

And if this strategy is applied to trading financial assets to find the worth of investment.

For example:

Group Asset RRR
Group 1  BTC/USD 1:0.5
Group 2  CAD/JPY 1:1
Group 3  AAPL 1:5

 

 

 

Where can you find these ratios?

You buy AAPL at $1,000. Then, set a stop loss at $800 because you can allow a loss of $-200. Set a take profit of $2,000 and expect to make a profit of $1,000.

 

Formula:

Reward = Take Profit Price  – Entry Price

Risk = Entry Price  – Stop Loss Price

Risk Reward Ratio = Reward / Risk 

 

Risk Reward Ratio = (2,000 –1,000) / (1,000 – 800)

                                 = 1,000 / 200

                                 = 5 or 1:5

 

That means the risk is less than the reward at a ratio of 1:5, or this investment has a risk of loss of 1 unit perchance to make a profit of 5 units.




What is the importance of risk and rewards?

Risk and Reward are important as follows:

1. Planning an investment strategy: Investors who plan a strategy before investing will be able to see the value of each investment in the loss to the take-profit ratio, along with being able to handle unexpected risks.

 

2. Trading systematically according to strategy: Investors can choose to buy assets exactly at the point. An appropriate profit-loss point is set. To mitigate risks that exceed expectations.

 

* Setting profits too high beyond reality, instead of investors receiving profits, means that when the graph goes up and down to a certain point, the fluctuations of assets cause the graph to rebound instead.