Trading is all about weighing the risk vs. reward of each trade. You should already know prior to entering a trade what you are risking(basically how much money can you potentially lose on this trade). You should also already know your reward potential as well(how much money you can potentially make on the trade). Now you may be asking well the risk is all the money I used to enter the trade and the reward is unlimited if I hold it and it keeps going in my direction. Technically yes, that is correct but, you want to weigh the risk vs. reward for your personal trade and the reason you are entering the trade.
Here is an example: Say you want to buy a Call Option on Stock XYZ which is trading at $50.20. You have charted a support level at $50 and you have eyed a potential exit $50.60. So you risk vs. reward is 2 to 1 in favor of reward because you essentially are risking a 20 cent move to the downside for a potential 40 cent move to the upside.
Let's check out another example: You are going to play a Put Option on stock XYZ which is trading at $104. You feel like this trade is a little more risky than some other trades you have been in and want to trade based off percentages. So you say you are going to exit this trade for profit if it reaches 15% profit and if you get to 10% loss you are going to cut the trade. So this trade is still in your favor as you are risking a 10% loss for the potential of a 15% gain.
This is a MUST before entering a trade. You shouldn't enter a trade if you don't know what your risk vs. reward on the trade is. You should have a planned entry and exit strategy and you need to pretend or think to yourself "If someone asked my why I am getting in this trade and what my exit plan is, will I be able to answer that question." If the answer is no you can't answer the question then cancel your pending order and don't enter the trade. If your answer is yes and you can go into detail on why you entered the trade then congrats, you have done your homework and have a reasonable analysis on why you are executing this trade.
I highly recommend you start adopting this mentality if you haven't already and before you enter a trade make sure you can provide reasoning on why you entered that specific trade. If you have any questions or want to share your risk vs. reward strategies feel free to leave a comment below.