1. What is Reward-to-Risk Ratio in Trading?

Definition: The reward-to-risk ratio (RR) measures the potential reward of a trade relative to its potential risk.

Purpose: It helps traders evaluate whether a trade is worth taking based on the potential upside versus downside.

2. How Does the Calculator Work?

The calculator uses the formula:

Where:

• \( RR \) — Reward-to-risk ratio (dimensionless)
• \( G \) — Potential gain (currency, e.g., USD)
• \( L \) — Potential loss (currency, e.g., USD)

Explanation: The ratio compares how much you expect to gain versus how much you're willing to lose on a trade.

3. Importance of Reward-to-Risk Ratio

Details: A ratio greater than 1 means potential gains outweigh potential losses. Many successful traders look for ratios of 2:1 or higher.

4. Using the Calculator

Tips: Enter your expected gain and acceptable loss in USD. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's a good reward-to-risk ratio?
A: Generally, 2:1 or higher is recommended, meaning potential profit is at least twice the potential loss.

Q2: How do I determine my potential gain and loss?
A: Gain is typically the difference between entry and profit target prices. Loss is the difference between entry and stop-loss prices.

Q3: Should I always aim for high RR ratios?
A: While higher is generally better, also consider the probability of success. A trade with 3:1 RR but low probability may be worse than 1.5:1 with high probability.

Q4: Does this account for win rate?
A: No, this is just the ratio for individual trades. You should also consider your historical win rate for complete risk assessment.

Q5: Can I use this for other investments besides trading?
A: Yes, the concept applies to any investment where you can define potential upside and downside.