#RiskRewardRatio The risk-reward ratio is a measure that compares the potential gain with the potential loss of an investment or trade. It is a fundamental tool for successful trading.

How it is calculated

- It is calculated by dividing the potential loss by the potential gain.

- It is expressed as a ratio, for example, 1:3

Importance.

- Determines whether to invest in an opportunity or let it pass.

- Determines where to close to take profits or avoid losses.

- Ensures that the potential reward is greater than the potential risk.

Example

If you risk S$100 and expect to gain S$300, the risk-reward ratio is 1:3, or 0.33

If a trader has a potential difference of 40 pips between their entry price and stop loss, and a difference of 120 pips between their entry price and take profit, the risk-reward ratio is 120/40 = 3 and is expressed as 1:3

Every trade or investment carries an inherent level of risk and reward.