How to Use and Calculate Risk/Reward Ratio for Trading

In this video, we are going to discuss the risk to reward ratio. This is something that every trader needs to include within their money management techniques. You may have heard of traders who generate more winning trades than losing trades, but still lose money. So, their wins tend to be constant and frequent, and usually the same amount in every single trade. But then a single loss takes out either two or three of their winners and in the end, they end up on a losing position for the day.

One of the reasons for this could be that the risk to reward ratio is not correct. So, what is the risk to reward ratio? The risk is the amount of money you are willing to risk within a trade and the reward is the potential profit target that you are aiming to get. So, in terms of the ratio between the two, what is recommended? Well, professional traders recommend a ratio of 1:3.

So, this means that your reward is 3 times the amount of that risk. So, basically if you lose once, you still have another two trades worth of winnings to rely on. In terms of our calculation. the only thing that we need to do is to divide the reward by the risk to see what ratio is relative to our trade. Let us assume our potential profit target will provide for us is $100. The risk that we are putting up is $50. So, our risk to reward is 1:2. If we do this on every single trade, all we need is one win out of two to basically be in a profit making position.

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