Asymmetric risk reward

Asymmetric risk reward ⦁ Positive ⦁ Negative Positive Asymmetrical Risk Reward is when the potential reward is much greater than the potential risk. Negative Asymmetrical Risk Reward is when the potential risk is much greater than the potential reward. It goes without saying that as a trader you want the positive asymmetrical profile. So when we talk about asymmetrical opportunities it’s with regards to the positive risk rewards profile. What constitutes an asymmetrical risk/reward profile? Usually if the risk is 3 or 4 times the reward, or vice versa, this is considered asymmetrical. This is called 3:1, or 4:1 reward/risk ratio. A risk of $200 and potential reward of $800 would be asymmetrical; minimum loss and maximum profit. Why look for asymmetrical trades? You might be thinking what’s the use of aiming for asymmetrical trades, doesn’t that count as greed? And we always here that emotions need to be separated from trading, so what is this about? Well, firstly, no this is not greed. It’s a strategy.

 


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