Course Content
What Is the Risk/Reward Ratio and How to Use It
Should I risk my time to get rewarded with the information in this article? The risk/reward ratio tells you how much risk you are taking for how much potential reward. Good traders and investors choose their bets very carefully. They look for the highest potential upside with the lowest potential downside. If an investment can bring the same yield as another, but with less risk, it may be a better bet. Interested to learn how to calculate this for yourself? Let’s read on. Contents Introduction What is the risk/reward ratio? How to calculate the risk/reward ratio The reward/risk ratio Risk vs. reward explained Closing thoughts
What Is the Risk/Reward Ratio and How to Use It
About Lesson

The risk/reward ratio (R/R ratio or R) calculates how much risk a trader is taking for potentially how much reward. In other words, it shows what are the potential rewards for each $1 you risk on an investment.

The calculation itself is very simple. You divide your maximum risk by your net target profit. How do you do that? First, you look at where you would want to enter the trade. Then, you decide where you would take profits (if the trade is successful), and where you would put your stop-loss (if it’s a losing trade). This is crucial if you want to manage your risk properly. Good traders set their profit targets and stop-loss before entering a trade.

Now you’ve got both your entry and exit targets, which means you can calculate your risk/reward ratio. You do that by dividing your potential risk by your potential reward. The lower the ratio is, the more potential reward you’re getting per “unit” of risk. Let’s see how it works in practice.