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Reward to Risk Ratio

What is Risk Management?

The stock market is a system based upon risk and reward. Risk is a part of every trade; a strong risk management system should be a part of every trader’s stock and options trading strategy.

Whether you’re new to the stock and options trading market, or you’re an experienced trader looking to improve your risk management strategy, Chuck Hughes can help you with your portfolio risk management.

Chuck Hughes has learned how to manage risk so that his potential for rewards are exceedingly greater than his potential for loss. You can learn Chuck Hughes’ risk management strategies when you use him as your options trading advisory service. Call Chuck Hughes today at (866) 661-5664 or Get More Information about portfolio risk management strategies.

Chuck Hughes’ Risk Management Strategy

Chuck Hughes’ risk management strategy involves at least a 4:1 risk to reward ratio. This ratio utilizes low-risk investments in order to protect your money and achieve a high level of portfolio risk management.

Chuck Hughes values his clients and their money. Chuck always suggests trading with at least a 4:1 reward to risk ratio.

 

Guidance from Chuck Hughes will help you select the most suitable portfolio so you can utilize the safest portfolio risk management system. Your portfolio will allow you to maximize returns and manage risks. You can achieve a lower risk ratio with Chuck’s advisory services.

Chuck Hughes maintains a minimum of 4:1 reward to risk ratio for all of his options trades. This is in order that he might maximize on his potential profit and reduce his risk for loss. If you follow Chuck Hughes’ advice, you won’t have to worry about calculating the reward to risk ratio because Chuck Hughes does that for you!

The likelihood of success is much greater than the probability of loss when you follow the investment strategies and recommendations that Chuck Hughes provides. Chuck Hughes has members who have a 22:1 reward risk ratio. This is not a fluke. You can achieve similar results when you use Chuck Hughes as your options trading advisory service.

Call Chuck Hughes today at (866) 661-5664 or Email Us and start trading options with high potential for gains and low risk for loss.

Why is Risk Management So Important?

Trade Options Now!Portfolio risk management is important when trading stocks and options. The stronger your risk management system is, the safer your investment will be.

It’s advised that you calculate your level of risk for every trade you make. Your goal is to manage risk within your portfolio to achieve the maximum benefit from your trades.

Experienced traders understand that portfolio risk management is important when it comes to trading stocks and options. A person should always conduct a risk analysis before making any trade. However, this step is often overlooked by new and inexperienced traders.

It’s especially important for beginning investors to give attention to risk analysis. Risk analysis is crucial to ensure a trader doesn’t risk more than they can afford to.

Many inexperienced (and some experienced) traders use gut-feeling to base their trading decisions on. A risk management system can evaluate these ‘gut-feeling’ trades to calculate their actual potential for gain and loss. Many times traders trading on ‘gut-feeling’ will be surprised at how mathematically incorrect their feelings are.

Chuck Hughes’ risk analysis method utilizes the reward to risk ratio.

What is the Reward to Risk Ratio?

Risk is part and parcel of trading. The reward to risk ratio is an important risk management and trading tool that is used to determine if a trading system is likely to be consistently profitable.

The reward risk ratio is a measure of reward versus risk. It is calculated by dividing the total potential profit by the total potential loss. You can increase your level of portfolio risk management by following certain strategies as set forth by Chuck Hughes.

Learn more about your portfolio risk management by calling Chuck Hughes today at (866) 661-5664, or Get More Information and start trading options with high potential for gains and low risk for loss.

Reward to Risk Definition

The risk ratio formula is a ratio used to calculate the amount of risk taken for the potential investment return within the arena of stocks, options trading, futures trading, forex trading, as well as various other trading markets.

The reward to risk ratio works based upon this premise: the higher the ratio, the lower the risk is compared to the potential return on investment. Conversely, the lower the ratio, the higher the risk is compared to the potential return on investment.

Reward Risk Ratio vs. Risk Reward Ratio

Trade Options with Decreased RiskAlthough ‘reward to risk ratio’ and ‘risk to reward ratio’ sound similar, they’re not interchangeable. In fact, they are exact opposites. A 2:1 reward risk ratio would equate to a 1:2 risk reward ratio.

A reward risk ratio is calculated by dividing the potential profit by the potential loss whereas a risk reward ratio is calculated by dividing the potential loss by the potential profit.

A reward risk ratio produces a positive number when the potential profit exceeds the potential loss whereas a risk reward ratio produces a positive number when the potential loss exceeds the potential profit.

Options trading tends to use the reward risk ratio calculation and verbiage to define this risk management system. The realm of options trading prefers to use reward to risk ratio because a larger ratio is implicative of a higher potential for gain.

Why is the Reward to Risk Ratio Critical for Options Trading?

The reward to risk ratio is especially helpful when trading in options. As opposed to stock or futures trading, the potential for profit and loss is more convoluted in options trading. The reward to risk ratio is extremely helpful in providing clarity for the potential risk and profit that an options trade can produce.

Options trading is generally less risky than trading in stocks. The options market allows a trader to produce a higher reward to risk ratio than trading stocks. The maximum loss of an option is the amount you paid for the option, however, the potential for profit can be equivalent to the value of rising stock. This idea is explained by the term ‘convexity’.

The beautiful thing about options trading is its ability to have a higher reward to risk ratio because of its ability to be used as a leveraging tool.

Risk Ratio Formula: How to Calculate Reward to Risk Ratio

Start Trading OptionsThere are two ways to calculate reward to risk ratio:

1) by using a risk ratio calculator, or

2) by calculating the equation manually using the risk ratio formula.

The risk ratio formula equals the expected return divided by the standard deviation. Because most options strategies have pre-defined points for maximum risk and reward, calculating the reward to risk ratio is simple.

The Risk Ratio formula = Expected Return/ Standard Deviation

For example, if the strike prices are $20 and $10 and costs $2 to put on, its maximum potential return would be $8, because $10-$2=$8. Let’s say the stock closes at or above $20 upon expiration and its maximum potential loss is the amount you paid for it, which was $2. The reward to risk ratio = 8/2 = 4. This means this spread would have a reward to risk ratio of 4:1. This would be a low-risk trade.

The Reward to Risk Ratio = 8 (expected return) /2 (standard deviation)

Reward to Risk Ratio = 4:1

A 4:1 risk to reward ratio means for every $1,000 a trader could make they risk losing $250.

Low Risk Investments vs. High Risk Investments

The reward to risk ratio is subjective for each person; each person has their own style of portfolio risk management. One trader might be comfortable making high risk investments whereas another trader would not. Typically, the higher the investment risk, the greater the potential for profit.

Most options trading investors would think that an acceptable reward to risk ratio is 3:1; some are satisfied with 2:1. The most aggressive traders will only trade using a 4:1 reward to risk ratio.

What does the 4:1 reward to risk ratio mean? This means for every $1,000 you could make you risk losing $250, or for every $15,000 you have the potential to make you risk losing $3,750.

Call Chuck Hughes today at # (866) 661-5664 in order to maintain your portfolio risk management, or Email Chuck and start trading options with high potential for gains and low risk for loss.

Futures trading involves high risks with the potential for substantial losses. Hypothetical performance results have many inherent limitations, some of which are described as follows. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. there are numerous other factors related to the markets related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. Option and stock investing involves risk and is not suitable for all investors. Only invest money you can afford to lose in stocks and options. Past performance does not guarantee future results. The Chuck Hughes Inner Circle Advisory trade record does not represent actual investment results. Trade examples are simulated and have certain limitations. Simulated results do not represent actual trading. Since the trades have not been executed, the results may have under or over compensated for the impact, if any, of certain market factors such as lack of liquidity. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.