Wednesday, April 17, 2024

Reward to Risk Ratio (RRR)

Reward to Risk Ratio (RRR) measures a trade’s potential return relative to its predetermined risk of loss.

The ratio is calculated by dividing the profit expected from a trade by the possible loss from the trade.

For example, let’s say you want to earn $100 by buying EUR/USD.

If you set your stop loss to only lose $25, the reward to risk ratio of your trade is 4:1 (100 / 25).

How to measure risk-return ratio (RRR)

It’s a simple 4 step process:

  1. Evaluate potential price levels for Stop Loss (SL) and Profit Target (PT)
  2. Measure the distance between your entry point and your stop loss (SL). This is your “Potential Risk
  3. Measure the distance between your entry point and your Profit Target (PT). This is your “Potential Reward”.
  4. Separate the two: Potential rewards / Potential risks

If you want to learn more foreign exchange trading knowledge, please click: Trading Education.

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