What you need to know about Risk-Reward Ratio

I'm surprised to see people keep arguing the simple Risk:Reward concept and the viability of it. I believe it should not be a really complied idea to deal with.

The goal of trade is to create profit. It's not required to have a minimal RRR, but the combination of RRR and winrate needs to become profitable, and of course the more profitable, the better.

Note that RRR is Risk:Reward, the bigger is the worth, the risker is a trade.

In a simplified model, breakeven trades are discounted and each trade risk the exact same amount and target to the same amount of reward.

Thus,
Average Profit/Loss per trade = WinRate * Reward - (100% - WinRate) * Risk

For a profitable method:

WinRate * Reward - (100% - WinRate) * Risk gt; 0

WinRate - (100% - WinRate) * RRR gt; 0

Therefore,
.... RRR
WinRate gt; ----------
... (1 RRR)

by way of instance, for in a trading system, a trader risk 5 unit for 1 unit payoff.

The WinRate must be achieved to become profitable is 5/(1 5) = 83.3%

If such a WinRate is attained, it is a profitable method.

But to answer just how profitable a method is, we need to create use of the idea of profit element.
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Although multi-stage profit-taking egy is often utilized in several trading methods, the concept can be the same.

The RRR and WinRate could be determined depending on the true transaction result. For instance, there are 14 trades in a sample under, together with 4 breakeven transactions dismissed in the calculation.

-20... 0... 200
-40... 0... 140
-50... 0... 300
-20... 0... 240
-80
-30
----------------------
-240(6)... 0(4)... 880(4)

In this instance, the normal risk is -240/6 = -40, along with the normal reward is 880/4 = 220.

The RRR is thus 40/220 = 2:11

And the WinRate is 4/(4 6) = 40%.

The Profit Factor could be 880/240 = 3.67

Hope this can explain some misunderstanding regarding RRR.
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A lot of trading approaches are notoriously difficult to pin down as to just how much profit or loss they'd make over time. Dozens or more times, you'd have to write down precisely the way you chose each trade exactly based on this trading method, rather than deviate from the trading technique.
Many men and women who trade alter their method slightly every day or week, and plogy severely weights against any test of a trading system's effectiveness being reliable. Plus, a method the individual trading uses without consciously declaring it, such as the I just know that part when observing the unseen motions of the tick and the related new price, could be involved.

I have always admired people who could make an r:r, and am completely for and wish to get it done.
Any advice on how to get past the aforementioned difficulties, or correction of any truths the aforementioned states?

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Originally Posted by ;

A lot of trading methods are notoriously tough to pin down as to how much profit or loss they would make over time. Dozens or more instances, you'd have to write down exactly the way you chose each trade exactly based on this trading method, rather than detract from your trading method. Many people who trade alter their egy slightly every day or week, and plogy seriously weights against any test of a trading method's effectiveness being reliable. Additionally, a method the person trading uses without consciously declaring it, like the I only know that...

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OK this really simple. . RRR
ie.
If your stop loss is 25 pips make sure your goal is 75 or greater 100 pips
BUT The trick is to discover a fantastic Stop loss - in case you cannot find one do not take trade
Also it assists trading with the trend!

Its that simple.

Good info... thanks.

Good read. Thanks for sharing, newbies should start looking into RR and basic things more than just how to make big dollars

Very Good read for newbies. Thank you for sharing

What I do not know about R:R is how do people know what the reward will be? Yes you can imagine that price will likely proceed to another S/R zone but that also has a 50/50 chance of happening.

A lot of people say aim for no less than 1:2 but how in the world would you guarantee that the profit is double the reduction in case you don't have control of the way price moves?

If I were intending to utilize a Risk:Reward ratio of 1:1 and assume I have a 50 percent WinRate.
That is just sufficient to break even.

However, suppose I moved the stop loss to break even on trades that went in my favor early on.

I might get stopped out on minor pull springs which would have ended up reaching tp.

Would you think the positive ramifiions of eliminating risk on ~50% of trades offsets negative possible effects of altering Risk:Reward ratios?

My favored step of the profitability of a technique is Profit Factor, it is simply the ratio of Gross Profit/ Gross Loss. i.e.

.... Gross Profit
Profit Factor = --------------
.... Gross Loss

Concerning RRR and WinRate, Profit Factor can be computed This Way.

Profit Factor = Gross Profit / Gross reduction
... = WinRate * Reward / ((100% - WinRate) * Risk)
... = WinRate / ((100% - WinRate) * RRR)

Mathematically, the aim of a trader is to optimize the purpose of the Profit Factor by finding the best mix of WinRate and RRR as in the formulation.

(Notice that another significant element have to be considered if appraise a trading method is the frequency of this installation. The more installation offered by a profitable method the greater. Nevertheless, this component is not discussed here.)
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