The trade plan and risk to reward
Lesson 12 of 16 in the course “Futures from Zero”. Free, with animations and a quiz.
Plan first, then the button
A pilot runs a checklist before takeoff, even after a thousand flights. Trading is the same. Before each trade, answer six questions: why am I entering, where does the idea break (the stop), where do I take profit (the take), what size at 1% risk, is the profit worth the risk, and have I written it down. If any question has no answer, you don’t open the trade.
Risk to reward
Compare how much you can lose with how much you can make. Nika sets the stop 2% from the entry and the take at 4%. Risk 1R, target 2R, a 1:2 ratio. If the trade works, she earns twice what she’d have lost. Such trades forgive mistakes: you can be wrong more often than right and still end up in profit.
You don’t need to be right every time
At 1:1 you need to win more than half your trades just not to lose. At 1:2, one in three is enough, at 1:3, one in four. That’s before fees, with them you need a bit more. Hence a simple rule: don’t open trades where the possible profit is smaller than the risk. Even if it feels like “this will surely go up”.
The trade journal
Without notes it feels like you’re “mostly up”, while the numbers often say otherwise. The journal is simple: date, instrument, long or short, reason for entry, entry, stop, take, risk, result in R and a few words on how you felt. After 20–30 trades you’ll see what works and what doesn’t. In the practice terminal the journal fills itself, with a field for your rules next to it.
Check yourself
- Stop $5 from the entry, take $15. What’s the risk to reward?
Correct answer: 1:3. You risk $5 to make $15, so 1R for 3R. - Nika trades at 1:2. What’s the minimum share of winners to not lose (before fees)?
Correct answer: About one in three. One +2R win covers two −1R losses. So at 1:2 about 33% winners is enough. - What if you can’t answer “where does my idea break”?
Correct answer: Don’t open the trade. Without a stop level there’s no position size and no plan. Skip it: the market will offer another.