Risk to reward

The ratio

The risk to reward ratio compares the potential profit of a trade, the reward, to its potential loss, the risk. A favorable ratio aims for a larger potential profit than potential loss.

It has to be read together with your success rate. A newer trader with a low success rate and a high risk to reward can still be profitable, and that is the whole point of the ratio.

A week of three trades

Imagine a 1,000 dollar account and a goal of 50 to 60 pips a day at a risk to reward of 1 to 3. At that ratio you can lose two trades in three and still come out ahead.

You take a sell on EURUSD at 0.10 lot, which is 1 dollar per pip. The stop loss is 20 pips and the take profit is 60 pips. You lose the trade: minus 20 dollars.

You take a buy on AUDUSD at 0.10 lot, again 1 dollar per pip, with the same 20 pip stop and 60 pip target. You lose the trade: minus 20 dollars.

You take a buy on GBPUSD at 0.10 lot, same stop, same target. You win the trade: plus 60 dollars.

Two losses and one win, and the week is 20 dollars ahead. That is why the ratio matters more than the win rate when the setups are right.

Every trade in R

With a stop and a target on each trade, TradeDNA records the planned risk to reward on the Trade Desk and shows every result as a multiple of what you risked, so you can see whether your real ratio matches the one you planned.