Asymmetric Trading: Beginner’s Guide

People unfamiliar with the topic may ask, “What is asymmetric trading?”  

Interestingly, it is possible to guess the meaning from the name itself; asymmetric. The word suggests unevenness, and that is exactly what asymmetric trading is all about.

To make a long story short, asymmetric trading is where there is an imbalance between risk and reward. 

What’s important, there are two types of asymmetric risk-reward profiles. The first one is positive, and the second one is negative. 

Notably, a positive asymmetrical risk-reward profile occurs when the potential profit is bigger compared to the potential loss. On the contrary, negative asymmetrical risk reward occurs when the potential loss is bigger compared to the potential profit.

Your goal is to be in a position where you have an asymmetric risk reward.

Interestingly, if you risk $1000 and have the potential to win $4000, you have just made an asymmetrical trade.

On the contrary, if you risk the same $1000, however, you only have the potential to make $1000; you made asymmetrical trade.

It is important to note that we can distinguish two forms of asymmetrical trading opportunities: 

• Trades with a high winning percentage.
• And the second form is a trade with a high risk-reward ratio. 

Importantly, with a 60%, 70%, or 80% winning rate, you have the opportunity to conquer pretty small risk-to-reward ratios.

The risk-reward profile of your trade will dictate whether or not you will be successful at trading.

The best-case trade scenario is to have a high-risk reward ratio and a high winning percentage simultaneously. 

What do you need to know about an asymmetrical risk/reward profile?

In most cases, if the risk is 3 or 4 times bigger compared to the reward, or if the reward is considerably bigger compared to the risk, this is considered asymmetrical. 

For instance, a risk of $400 and a potential reward of $1600 would be asymmetrical.

People who are not familiar with asymmetrical trading may ask, “Why should I look for asymmetrical trades?” You might be thinking, what is the use of aiming for asymmetrical trades? Doesn’t that count as greed?

No, it is a strategy. In order to understand the strategy, it is important to take into consideration the risk rule. 

Are you familiar with the 1% risk rule? 

According to the rule, it is better not to risk more than 1% of your account for one trade. Thanks to the 1% risk rule, it is possible to limit the risk. 

Nevertheless, the above-mentioned rule also has its disadvantages. It isn’t for everyone. 

What is the solution?

It makes sense to search for asymmetrical trade opportunities. Why? 

As opposed to the 1% risk rule, it is possible to make good returns. Moreover, there is no need to risk your financial stability. 

Asymmetric Risk Profile and your Portfolio

Hopefully, it is possible to invest in companies from around the world. Without a doubt, it is easier to look for asymmetrical risk-reward opportunities. 

For example, a stock with limited downside risk but a huge potential of making big profits.

Hopefully, you have the ability to utilize financial ratios such as the return on equity ratio in order to reduce the risk. 

We shouldn’t forget about growth stocks. It makes sense to include them in your analysis.

Let’s take a break from asymmetrical trading for a minute. 

Growth stocks

As mentioned earlier, it is desirable to pay attention to growth stocks. 

Growth stocks grow faster compared to the average stock in the market and, as a result, generate earnings more rapidly. 

Now, we can focus on the characteristics of growth stocks.

We need to mention a high growth rate. They tend to show a considerably higher growth rate compared to the average market growth rate. 

In most cases, growth stocks pay low or no dividends. Why?

Growth companies grow very fast. They use the money in order to earn more money.  

Such companies usually demonstrate a considerably higher growth rate because growth companies tend to possess some kind of competitive advantage over their rivals. The competitive advantage gives growth companies a unique selling proposition (USP), which helps to reach better results compared to their competitors. 

It is hard to overestimate the importance of brand loyalty. Growth companies earn billions of dollars thanks to loyal customers. 

As stated earlier, growth stocks pay low dividends or no dividends at all. As a result, people who have invested in such stocks don’t make much out of their investments in the short term. Nevertheless, the situation is totally different when it comes to the long-term outlook. Investors make substantial revenues through capital gains.  

Several examples of growth stocks 

The list of growth stocks is quite interesting. The e-commerce giant Amazon is on the list. It is one most successful growth stocks. 

The company has reached formidable results. It is hard to imagine the modern world without Amazon. 

The tech giant Apple is another example. Interestingly, it is another example of the most coveted growth stocks. What’s interesting is that Apple remains one of the most successful tech companies even after so many years. Millions of people from all over the world love iPhones, iPad, and other electronic devices developed by Apple. 

The list of profitable growth stocks would be incomplete without Netflix. Without exaggeration, Netflix is an iconic company. 

Since Netflix was the first one to offer streaming services. Furthermore, Netflix is one of the most recognizable companies in the world.  

In conclusion, it is vital to understand the importance of the asymmetric risk-reward profile. It is crucial to develop your skills in order to spot and then have the patience to wait for the best asymmetrical trading opportunities.