All investments carry risk. It’s the nature of the beast. However, there are definite strategies that can be applied to keep risk low yet offer a high yield.
This is known as the Risk to Reward Ratio or R/R R.
At TMI we apply a 1:3 R/R R at any given time. Only when market conditions are highly favorable do we increase our R/R R to 1:4 and possibly 1:5. The latter is a very rare occurrence at our company since market conditions must be exceptionally favorable to justify this ratio.
R/R R Explained:
Risk/Reward Ratio is a formula used to measure the expected gains of a given investment against the risk of loss.
At TMI we apply a 2% risk of Total Account Balance to all investments. Our company’s standard R/R R is 1:3. This means that we aim to generate profits that are three times the possible risk.
— EXAMPLE —
Total Account Balance (TAB) : $100,000
Maximum Risk per trade 2% : $2,000
Reward Ratio 3 X maximum risk: $6,000
Making an investment, following the hypothetical example above, we would be willing to invest (risk) $2,000 to achieve a potentially $6,000 return (profit).
Of course, this is purely speculative as we have no guarantee that the market will continue to move in our favor until we realize the 1:3 ratio.
To limit investment risks, we combine our profit ratio with strict money management rules. When the market does not continue to move in our favor, we may choose to exit the trade at a ratio that is less than the company’s preferred 1:3.
We much rather prefer a smaller profit over a loss, even if that profit is less than our desired 1:3 ratio.
A new R/RR is calculated every time we initiate a new trade. As such we assure ourselves strict compliance with our company’s money management rule to never risk more than two percent (2%) of the total account balance per trade.
For more information about TMI’s R/RR or our company in general, please contact us.