Consider a strategy for day-trading stocks in which the maximum risk is $0.04 and the target is $0.06, yielding a risk/reward ratio of 1-to-1.5. A trader with $30,000 decides that their maximum risk per trade is $300. Therefore, 7,500 shares on each trade ($300 / $0.04) will keep the risk within the $300 cap (not including commissions).
Here’s how such a trading strategy might play out:
- 60 trades are profitable: 60 × $0.06 × 7,500 shares = $27,000.
- 45 trades are losers: 45 × $0.04 × 7,500 shares = ($13,500).
- The gross profit is $27,000 – $13,500 = $13,500.
- If commissions are $30 per trade, the profit is $10,500, or $13,500 – ($30 × 100 trades).
Of course, the example is theoretical. Several factors can reduce profits. A risk/reward ratio of 1-to-1.5 is used because the number is fairly conservative and reflective of the opportunities that occur all day, every day, in the stock market. The starting capital of $30,000 is also just an approximate balance to start day-trading stocks. You will need more if you wish to trade higher-priced stocks.