#RiskRewardRatio is an important analysis tool used by traders and investors to assess whether a trade is worth the risk. What is the risk to reward ratio? It is a ratio that compares the potential loss in a trade to the potential profit from it. It is calculated as follows: Risk/Reward Ratio = (Loss Target) / (Profit Target) Practical Example: - If you bought a currency at a price of $100 - Set the stop loss at $90 (i.e., a loss of $10) - And the profit target at $130 (i.e., a profit of $30) Then the ratio would be: > 10 / 30 = 1:3 You risk $1 to make $3. What are good ratios? - 1:2 or higher is considered good, as you only need to be right in less than 50% of the trades to be profitable. - 1:1 is used in short-term strategies or in highly liquid markets. - Less than 1:1 means that the risk is greater than the potential profit, and is usually not preferred except in special cases. Importance of using the ratio: - It helps you make informed decisions. - It improves capital management. - It reduces emotions during trading. - It is used with other tools such as entry points, support/resistance, and stop.