How to Improve your Risk to Reward Ratio when Trading Options

Moving Stops

Now, hopefully the trade has moved in your direction. Here is how you can try to maximize profit, and minimize losses.

• Place your initial stop behind support/resistance.
• Once your trade is up 10% - 20% (depending on volatility), move your stop to break even. This will help ensure your green trade doesnt go red. At this point the worst case is you don’t lose anything.
• Once the trade is up to 20% - 30%, move your stop up to 10% to guarantee a win.
• Continue to watch the chart. As your trade continues to move in your direction, continue to move your stop up to guarantee profits. If you see a huge candle/volume spike, it may make sense to take profits then, or keep a tight stop.
• As you approach your target, also tighten your stops or switch to a trailing stop to ensure profits.
• You may decide to keep runners after crossing your target in case it keeps moving in your direction.

Risk Management 101

Example:

You put $1000 into a trade. With a 20% stop you are risking $200.

• Scenario 1: Trade fails, and you stop out. LOSS = $200.

• Scenario 2: Trade works halfway to your target. You moved up stops and make 20%. GAIN = $200

• Scenario 3: Trade works as planned. You exit at target and make 50%. GAIN = $500.

Now, if you take 3 trades in a day, you can lose 2 trades (total loss = $400), but win on only 1 trade (gain = $500), and come out with a net gain of $100. So you will still be green with a 33% win rate for the day.

The goal should be to minimize how much you lose on the losing trades, and try to gain more than you lose on the winning trades. So then with a poor win rate, you can still be slightly green, and as you improve your entries on good strategies, you will increase your win rate, thus significantly improving your net gains.

Check out our Free Risk Calculator to calculate how to determine the amount you shoudld risk per trade.