#RiskRewardRatio
### **Risk-Reward Ratio (RRR): A Trader’s Guide**
**Definition:**
The RRR compares the *potential loss* (risk) of a trade to its *potential gain* (reward). It quantifies whether a trade is worth taking based on your profit objectives and risk tolerance.
#### **Formula:**
\[
\text{RRR} = \frac{\text{Potential Loss (Stop Loss)}}{\text{Potential Profit (Take Profit)}}
\]
*Expressed as a ratio (e.g., 1:3).*
---
### **Example Calculation**
- **Entry Price:** \$100
- **Stop Loss (SL):** \$90 (*Risk = \$10*)
- **Take Profit (TP):** \$130 (*Reward = \$30*)
\[
\text{RRR} = \frac{\$10}{\$30} = \frac{1}{3} \quad \text{(or 1:3)}
\]
*You risk \$1 to potentially gain \$3.*
---
### **Why RRR Matters**
1. **Risk Management:**
- Ensures losses are controlled and predictable.
- Example: A 1:3 RRR means you can be wrong 50% of the time and still break even (*if wins/losses are evenly distributed*).
2. **Trade Selection Filter:**
- Avoids low-reward, high-risk setups (e.g., 1:0.5).
- Prioritizes trades where reward *significantly* outweighs risk (e.g., 1:2 or better).
3. **Long-Term Profitability:**
- Consistent RRR discipline compounds gains over time.
---
### **Practical Tips**
✅ **Ideal RRR:** Aim for **1:2 or higher** (varies by strategy).
🔍 **Context Matters:**
- High-win-rate strategies (e.g., scalping) may tolerate lower RRR (1:1).
- Low-win-rate strategies (e.g., trend-following) need higher RRR (1:3+).
⚠️ **Reality Check:**
- Always factor in *probability* of hitting TP/SL. A 1:5 trade is useless if TP is unrealistic.
---
### **Common Pitfalls**
❌ **Ignoring Market Context:**
- A 1:3 RRR is meaningless if the TP aligns with strong historical resistance.
❌ **Over-Optimizing:**
- Don’t force RRR—adjust SL/TP to *market structure*, not arbitrary
