The Risk-to-Reward Ratio (R:R) is one of the most important concepts in trading.
It measures the relationship between how much you risk on a trade and how much you aim to gain.
In simple terms, it helps you evaluate whether a trade is worth taking based on the potential reward compared to the potential loss.
For example, if you risk $100 to potentially make $300, your risk-to-reward ratio is 1:3.
This means that for every dollar you risk, you aim to make three.
Why It Matters
The R:R ratio helps traders focus on quality over quantity.
Even if you don’t win every trade, maintaining a positive risk-to-reward ratio allows you to stay profitable in the long run.
For instance, if your average R:R ratio is 1:3, you can still be profitable even if you win only 40% of your trades.
That’s why professional traders always plan their trades with a clear R:R target in mind before entering the market.
How to Calculate It
You can calculate the ratio using this simple formula:
Risk-to-Reward Ratio = Potential Loss / Potential Profit
Example:
Entry Price: 1.2000
Stop Loss: 1.1950 → Risk = 50 pips
Take Profit: 1.2100 → Reward = 100 pips
R:R = 50 / 100 = 1:2
This means you are risking 1 unit to potentially gain 2.