Risk/reward ratio refers to the relationship between the risk present in a particular investment, in this case commodities, and the potential reward from the same investment. A riskier investment should offer a greater reward to compensate investors for the increased risk of loss. If an investment is judged to entail risk, then the reward must be higher than the risk-free rate of return to such a degree that the investor is fully compensated for the extra risk taken. If the reward is not compensatory, then the investment is judged to have a poor risk/reward ratio.
If you wish to trade commodities using binary options, this is a good way to minimise your risk exposure and lock in your profits and hence are a viable and stress-free trading strategy. You still need to bear in mind that the price can rapidly move against your trades, but if you strive to perfect your techniques, you can aim to attain trading positions that provide the opportunities for significant profits at minimum risk.
Here is a simple example that explains how it works; assume a scenario where your payout ratio if you finish in-the-money is 75% while your refund ratio is 0% if out-of-the money. This means that you are reward-to-risk ratio at activation is 3:4. For example, if you invested $100 then your maximum win would be $75 while your maximum loss would be $100.
The financial markets can, however, produce complex price formations together with extremely high levels of volatility. This is why it is important to focus on your potential losses first before thinking about profits. This essentially means that you need to assess whether your initial reward-to-risk ratio at the start of your new trade is acceptable.
You should also assess the possibilities regarding how quickly you can achieve a position whereby you can substantially improve this parameter. In simple terms, you need to attain a ratio of 1:1 so that you will not be risking any of your account balance at all. In addition, you need to achieve this objective while still allowing your trade enough of a margin for it to capture further profits.
If you adopt such policies that are constructed with the prime intention of reducing your risk exposure at the earliest and safest opportunities, then you will start to trade in the same manner as the experts. This approach is essential as the financial markets can generate such levels of volatility that you simply cannot afford to keep your equity exposed to high levels of risk for any extended period of time.
So how do you go about assessing the potential reward and risk of a particular commodity? You can determine the reward level by evaluating its strength in the market as well as that in relation to other commodities. You should consider current market conditions and conduct extensive research and technical analysis into your chosen commodity in order to ensure that you obtain an acceptable risk-reward ratio. If you decide to trade commodities on the binary options market, you can enlist the services of a broker who can assist you with your investment strategy.