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Risk Reward Ratio Formula:
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The Risk Reward Ratio is a key metric used by traders and investors to evaluate the potential profit of a trade relative to its potential loss. It helps in making informed decisions about whether a trade is worth taking based on the relationship between potential gains and potential losses.
The calculator uses the Risk Reward Ratio formula:
Where:
Explanation: The formula calculates how much potential profit you stand to make for every unit of currency you're risking. A higher ratio indicates a more favorable trade setup.
Details: A good risk reward ratio is essential for long-term trading success. Most professional traders aim for a minimum ratio of 2:1 or 3:1, meaning the potential profit should be at least 2-3 times the potential loss.
Tips: Enter your target price, entry price, and stop loss price in currency units. All values must be valid (prices > 0, entry price > stop price).
Q1: What is a good risk reward ratio?
A: Generally, a ratio of 2:1 or higher is considered good. This means your potential profit is at least twice your potential loss.
Q2: Can the ratio be less than 1?
A: Yes, but it's generally not advisable as it means you're risking more than you stand to gain.
Q3: How does this relate to position sizing?
A: The risk reward ratio helps determine how much to invest in a position based on your risk tolerance and the distance to your stop loss.
Q4: Should I always aim for high ratios?
A: While higher ratios are generally better, they should be balanced with the probability of success. A trade with a high ratio but low probability might not be better than one with a moderate ratio and high probability.
Q5: Does this work for all types of investments?
A: The concept applies to most trading and investment strategies, including stocks, forex, cryptocurrencies, and options trading.