If you pay $1000 to buy shares in a particular stock and the share price doubles, you will have made a profit of $1000, or 100%.
The most you could have lost would have been $1000, assuming the share price fell to zero, but when you sold the shares you received $2000, so the profit:loss ratio is 2:1.
But why would you let the share price fall all the way to zero? If you set a stop-loss order for your broker to sell your shares if their price fell 10%, then you would only be risking $100. In this case, your risk would have been $100, you sold your shares for $2000, so your profit:loss ratio would have been 20:1.
The most you could have lost would have been $1000, assuming the share price fell to zero, but when you sold the shares you received $2000, so the profit:loss ratio is 2:1.
But why would you let the share price fall all the way to zero? If you set a stop-loss order for your broker to sell your shares if their price fell 10%, then you would only be risking $100. In this case, your risk would have been $100, you sold your shares for $2000, so your profit:loss ratio would have been 20:1.
mobyrne
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thank you but thats what I dont understand I see people out there making more than the 2:1 profit loss ratio but still only have a 2:1 profit loss ratio. Do I sound ignorant or do you understand what Im trying to get at?
I don't understand what you're getting at.
In trading, its more normal to express performance in terms of risk:reward ratio, r:r.
You might want to post up an example showing where your confusion starts.
TammyJackson
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I agree with you. In fact, many people find it difficult to understand profit and loss ratios and understand the essence. As a rule, beginners face such difficulties. There is nothing terrible or shameful in this. I also had difficulty with this at first. However, I had a mentor. Maybe you should think about it too? I even now use a variety of assistants. These can be applications, sites with plans, tips, and other information related to stocks. Currently, I use the dividend method of investing at suredividend.com and see no shame in it. Quite the opposite, it is important they need to use various sources for successful investing.
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Chad Seven
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It sounds like you are under the impression your profit is somehow dependent on, or limited by, the width of your stop loss.
If your stop loss is 20 points and the stock moves 40 points in your desired direction then you have a 2:1 profit, i.e. your gain is twice your stop loss/risk. If it moves 60 points you have 3:1 etc.
If the stock moves 100% the ratio will again be calculated on the width of your stop and the size of the profit in points and I would expect a ratio a lot higher than 2:1 unless you use a very wide stop.
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