Risk/Reward Ratio

The risk/reward ratio is a formula that allows us to compare the potential profit (reward) to the potential loss (risk) of a trade.


Buying Price:       10

Take-Profit:          14

Stop-Loss:             8

Reward:               14-10 = 4

Risk:                     10-8 = 2

Risk/reward ratio:     4/2 = 2

In this case the risk-reward-ratio is 2. This means if the deal goes well the trader earns two times more than he or she risked.

What Is A Good Risk/Reward Ratio?

In general your risk/reward ratio should be 1 or higher to make sure your profit is greater than the risk. The higher the ratio is the less hits the strategy needs to be successful.

The legendary Turtle-Traders realized risk/reward ratios about 50(!) or higher. That means taking an investment of 1.000€ with an outcome of 50.000€.

It is very common for retail traders to use a risk/reward ratio of 1,5 or higher. Nevertheless there are strategies with a risk/reward ratio of less than 1, too.

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