The Risk/Reward Ratio is one of the most important concepts in the world of trading and investing. Let's explain it simply:
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What is the Risk/Reward Ratio?
It is a tool used by traders to measure the amount of risk versus the potential reward in a single trade.
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How is it calculated?
\text{Risk/Reward Ratio} = \frac{\text{Amount you may lose}}{\text{Amount you may gain}}
Example:
If you are risking $100 to achieve a profit of $300, then the ratio is:
\frac{100}{300} = 1:3
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What is the best R/R Ratio?
Many professionals prefer ratios like 1:2 or 1:3, so even if your success rate is only 40%, you will still be profitable in the long run.
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Why is it important?
It reduces the impact of losses.
It helps you build a strong trading strategy.
It makes you more committed to your plan and reduces emotional trading.
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Golden Tip:
Don't enter any trade before you know exactly:
Where you will exit if you lose (Stop Loss)
And where you will take your profits (Take Profit)
And what your R/R ratio is!
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