Risk Management
Risk/Reward Ratio
The potential profit compared to potential loss on a trade.
Full Definition
Risk/reward ratio (R:R) compares the potential profit of a trade to its potential loss. It's calculated by dividing the distance to your take profit by the distance to your stop loss. A positive R:R means your potential reward exceeds your risk. Most successful traders aim for minimum 1:2 R:R, meaning they risk $1 to potentially make $2.
Example
You buy at 1.1000 with stop loss at 1.0950 (50 pips risk) and take profit at 1.1150 (150 pips reward). Your R:R is 1:3. Even with only 33% win rate, this strategy breaks even. With 50% win rate, it's highly profitable.
Formula
R:R Ratio = (Take Profit - Entry) ÷ (Entry - Stop Loss)Related Terms
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