#RiskRewardRatio
RiskRewardRatio: The Trader’s Compass for Profitable Decision-Making**
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### **1. What is Risk-Reward Ratio (RRR)?**
The risk-reward ratio measures the **potential profit** of a trade relative to its **potential loss**. It quantifies whether a trade is worth taking based on how much you stand to gain versus what you could lose.
**Formula:**
\[ \text{RRR} = \frac{\text{Potential Risk (Loss)}}{\text{Potential Reward (Gain)}} \]
**Example:**
- You buy Bitcoin at $60,000.
- Set a **stop loss** at $54,000 (risk = $6,000).
- Set a **take profit** at $72,000 (reward = $12,000).
- **RRR = 6,000 / 12,000 = 1:2** → For every $1 risked, you aim to gain $2.
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### **2. Why RRR Matters**
- **Statistical Edge:** A positive RRR ensures that even with a <50% win rate, you can profit long-term.
- Example: 1:3 RRR + 40% win rate = Net profit.
- **Discipline:** Removes emotional bias by predefining exit points.
- **Capital Preservation:** Avoids "lottery ticket" trades where losses dwarf gains.
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### **3. Calculating RRR: Step-by-Step**
1. **Entry Price:** Price at which you enter the trade.
2. **Stop Loss (SL):** Price level where you cut losses.
3. **Take Profit (TP):** Price level where you secure gains.
4. **Risk** = Entry Price – Stop Loss.
5. **Reward** = Take Profit – Entry Price.
6. **RRR** = Risk ÷ Reward.
