Reward to Risk Ratio (RRR) measures a trade’s potential return relative to its predetermined risk of loss.
The ratio is calculated by dividing the profit expected from a trade by the possible loss from the trade.
For example, let’s say you want to earn $100 by buying EUR/USD.
If you set your stop loss to only lose $25, the reward to risk ratio of your trade is 4:1 (100 / 25).
How to measure risk-return ratio (RRR)
It’s a simple 4 step process:
- Evaluate potential price levels for Stop Loss (SL) and Profit Target (PT)
- Measure the distance between your entry point and your stop loss (SL). This is your “Potential Risk”
- Measure the distance between your entry point and your Profit Target (PT). This is your “Potential Reward”.
- Separate the two: Potential rewards / Potential risks
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