In life, we get hit by whatever risks we take. We usually make decisions to try to minimize the risks as much as possible – we don’t buy apartments with open balconies if we plan to have cats or children, we prefer cars with good quality airbags just in case of an accident, and we constantly pay insurance – in financial markets, it is about the same things.
What are specific risks?
By risk, we mean that we may experience losses in the assets we choose due to factors influencing or affecting their performance. In crypto, we are talking about the projects’ cyber safety, the coins’ excellent reputation, and the teams behind them as much as the sentiment in the market. In the stock market, we are discussing phenomena that could affect wine production or anything related to wine or agriculture; global supply and transport problems, and many other factors that hit businesses in these troubled times. Once a company experiences difficulties or losses, the stock price automatically falls. These are specific, unsystematic risks, and we can guard against them through diversification and very thorough research.
What is the market risk?
When we choose an asset, we do it based on a detailed technical analysis where we try to figure out how much we would earn if things go as we calculated. The risk-reward ratio thus compares a potential gain with a possible loss, should a specific unfortunate situation occur.
The returns that the asset should give are calculated with the risks and the result, for example, shows something like 2:5, where we are willing to risk 2 dollars to win 5. Therefore, even if a possible move could bring us a 2x, it is essential to check the details and market risks in advance and think about how much we are willing to lose for those positive returns when making a trading or investment plan.
How do we calculate the R:R ratio?
The ratio is calculated as follows: after the analysis over a certain period, we find out the potential gain through the realistic targets that we propose with the growth of that asset. Then, this net gain is divided by the price of the asset or currency’s entire risk. Typically, a ratio we would like should be at least 1:2 to indicate that a profit would be greater than a loss.
Losses are no joke when talking about hard-earned money. Calculating this ratio is very helpful for every retail investor or individual to make the best decisions that suit him according to his investor profile. People are willing to lose or not depending on what plans they would have with that money, the duration of the trade, or when it comes to a very high risk-reward ratio, where we risk a little but can win a lot – the kind of differences that we see especially in crypto. Given the much higher volatility and risk involved in crypto, they will always choose to trade if the potential gain would be much greater than a possible loss.
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Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not consider your individual needs, investment objectives, and specific financial and fiscal circumstances.
Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty, or undertaking, stated or implied, is given as to the accuracy of the information contained herein, and IXFI expressly disclaims any liability for the accuracy and completeness of the information contained in this article.
Investment involves risk; any ideas or strategies discussed herein should therefore not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial and fiscal objectives, needs, and risk tolerance. IXFI expressly disclaims any liability or loss incurred by any person who acts on the information, ideas, or strategies discussed herein.
