GOLD : What Should Be Ideal Risk Reward Ratio

20 mar 2023

XAUUSD

A good risk/reward ratio could be seen as greater than 1:3,

where you would risk 1/4 of the overall potential profit.

For trading to prove profitable in the long term, a trader should not typically risk their capital for a lower risk/reward ratio,

as this will mean that half or more of their investment could be lost.

The risk/reward ratio marks the prospective reward an investor can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns. A lower risk/return ratio is often preferable as it signals less risk for an equivalent potential gain.

Consider the following example: an investment with a risk-reward ratio of 1:7 suggests that an investor is willing to risk $1, for the prospect of earning $7. Alternatively, a risk/reward ratio of 1:3 signals that an investor should expect to invest $1, for the prospect of earning $3 on their investment.

Traders often use this approach to plan which trades to take, and the ratio is calculated by dividing the amount a trader stands to lose if the price of an asset moves in an unexpected direction (the risk) by the amount of profit the trader expects to have made when the position is closed (the reward).

KEY TAKEAWAYS

The risk/reward ratio is used by traders and investors to manage their capital and risk of loss.

The ratio helps assess the expected return and risk of a given trade.

In general, the greater the risk, the greater the expected return demanded.

An appropriate risk reward ratio tends to be anything greater than 1:3.