#RiskRewardRatio

Understand the Concept

Risk-Reward Ratio = (Potential Profit) / (Potential Loss)

Example: Risking $100 to make $300 = 3:1 ratio.

Define Your Trading Style

Are you day trading, swing trading, or investing long-term? Each style affects acceptable risk-reward levels.

Set Your Risk Tolerance

Know how much capital you're willing to risk on a single trade—usually 1-2% of your total capital.

Identify Entry Points

Use technical or fundamental analysis to pick a clear, justifiable entry point.

Determine Stop-Loss Level

Set a stop-loss where the trade idea is invalidated. This defines your "risk."

Set a Realistic Target

Choose a target based on resistance levels, price patterns, or fundamental upside.

Calculate the Ratio

Target minus entry = reward. Entry minus stop-loss = risk. Divide to get the ratio.

Aim for a Minimum Ratio

A minimum 2:1 ratio is often recommended. Higher is better, but it must be realistic.

Use Tools to Help

Platforms like TradingView or MetaTrader have risk-reward drawing tools to plan trades visually.

Journal Every Trade

Log your ratios, outcomes, and reasons. This helps refine your strategy over time.

Backtest Your Strategy

Run your system against historical data to confirm that your risk-reward ratios are profitable over time.

Avoid Emotional Trading

Stick to your stop-loss and take-profit levels. Don’t let fear or greed move your targets.

Adjust Based on Win Rate

Lower win rates require higher risk-reward ratios to be profitable, and vice versa.

Compound Your Gains

Reinvest profits, but scale up risk cautiously to maintain consistency.

Review and Refine Regularly

Monthly or weekly reviews help identify if your risk-reward assumptions still hold in changing markets.

Would you like an example or template to apply this in a spreadsheet or trading journal?

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