How do you determine your risk reward ratio?

Risk to reward ratio is determined by using the stop loss and target profit values.

Divide the amount you are willing to lose by the amount expected to earn when you close your position.

The simplest way to calculate risk reward ratio is by dividing stop loss (SL) pips  by take profit(TP) pips.

All these differ with different strategies and timeframe with the trade signals. This  means the SL and Tp pips on a bigger timeframe are much more than  those on a small timeframe.

Let’s look at the trade below on the AUDCAD daily chart below with a cup and handle pattern

From the above example;

Stop loss pips = 87 pips,   Take profit pips = 357pips

Therefore, Risk reward ratio = 87/ 357 = 1/4 ie 1:4

You must always take trades that atleast have a Risk Reward ratio of atleast 1:2. A good risk reward will profit you even when you undergo several   losses.  You should be able to make money over a series of trades even if you lose majority of them.

In our next lesson, we will learn how important risk reward ratios are! And how much significant they are to profitable successful trading.


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