Risk Analysis is critical to success in the stock market. Most investors and traders are focused on finding a stock to buy without considering the risk they are taking when entering the trade. Using risk analysis before each stock purchase, whether you intend to hold for long term or short term can make a significant difference in your profits.
Risk Analysis takes into consideration:
The length of time you wish to hold.
The potential gain (the reward), versus the potential risk of loss for the trade.
The amount of risk that is reasonable for that trade.
The amount of risk you should take for any one trade based on your capital and experience.
Risk versus reward ratio analysis helps you determine when to enter a stock . The optimal risk versus reward ratio is for every dollar at risk there is the potential for three dollars profit. Some trading styles can lower that to a 2/1 ratio but the ideal for most traders and investors will be 3/1.
TechniTrader®’s proprietary Risk Calculator makes it fast and easy to calculate the risk versus the reward for every trade you make.