When investment market is not working for you, the amount of money you may lose in one particular investment event is what we call risk. When represent risk with an R index number. We identify the possible worst situation and the worst loss that can happen when the item did not progress according to our plan. When you start estimating the amount of risk, the R, you bear in an investment item, you are focusing on the return to risk ratio. Perhaps you are already doing the same in other aspects of your life and now is the time to apply it to money.

When you are given two choices, how would you come up with your decision? For example, there are two different methods for you to go home, one is to go on the high way, and another one is to go through the street. If you choose the high way, you may be able to get home within 30 minutes if everything is smooth. But there is a possibility that there is a traffic accident and you would need two more hours to get home. Choice number two is to try the streets with fewer cars. There are many traffic lights and whatever the traffic is, you would need 45 minutes to get home.

The way you choose which way to go is the estimate the advantage of arriving home 15 minutes earlier and the hassle of potential traffic jam. This decision making process can be applied to investment management totally. We assess an investment opportunity with the return to risk ratio and see whether it worth noticing.

Top investors describe their market opportunities with return to risk ratios. These professional investors consider their risk factor, the R factor. If in an investment event your potential return is 3 times of the possible loss, we say it is a 3R opportunity. We use this simple notation to denote our investment opportunities, no matter it is stocks, mutual funds, properties or other investment tools. A 2R profit means the same in stock or property market. It means the potential return is 2 times the risk you bear. Let us see some examples.

Let’s say you predict that the property market is going up and you spot a fine house to capture the chance. You decided to buy it and sell it quickly to make a quick cash profit. For example, the price of the house is $80,000 and you have to pay $5000 to buy the house. The worst case is you lose the whole amount you pay, the $5,000. Therefore the amount $5000 is R. You plan to sell the house with $100,000. That implies a profit of $20,000. The profit is 4 times the amount you risked. So, we call this a 4R opportunity.

Let’s say it turned out the market didn’t go up as much as you thought and you sold the house with $90,000. You made a profit of $10,000. So, we say the investment becomes a 2R one because the profits is 2 times the risk factor.

Learn more about investment, visit: forex software system trading

Related posts:

1. Forex Investment Choice Forex investment is so common and is so easy to...
2. Strategies for Successful Investment Every successful story gives us insights on how to succeed....
3. How much money should I risk per trade? Do you want to know the simple steps that all...
4. Understanding The Stock Market Other than supermarket, there is another market that many people...
5. Understanding Spot Forex Market (Part I) Of all the financial markets, spot forex market maybe considered...

Related posts brought to you by Yet Another Related Posts Plugin.