R/R (Risk Reward Ratio)

Definition
A measure that describes the potential reward of a trade in relation to its potential risk.  It’s a way to assess the risk-reward profile of a trade setup.

Formula
R/R Ratio = Profit Target / Risk

• Profit Target: The difference between your entry price and your desired exit price for a profit.
• Risk: The difference between your entry price and your stop-loss level (representing the amount you’re willing to risk on the trade).

Example

• Entry Price: $10
• Profit Target: $12 (Potential profit of $2)
• Stop-Loss: $9 (Potential risk of $1)
• R/R Ratio = $2 / $1 = 2:1

This means that for every $1 risked, the potential reward is $2.

Key Points

• Trade Evaluation: A higher R/R ratio generally indicates a more favorable risk-reward profile.
• Target Setting: R/R highlights the importance of setting realistic profit targets in relation to your risk tolerance.