Learn Risk-Reward Ratio | Risk Management For Beginners

8 feb 2023

📚The risk-reward ratio (or risk return ratio) measures how much your potential reward (or return) is, for every dollar you risk.

📚For example:
If you have a risk-reward ratio of 1:3, it means you’re risking $1 to potentially make $3. If you have a risk-reward ratio of 1:5, it means you’re risking $1 to potentially make $5. You get my point.

⚠️Now, here’s the biggest lie you’ve been told about the risk reward ratio:

“You need a minimum of 1:2 risk reward ratio.”

This statement is incorrect! Because the risk-reward ratio is meaningless on its own.

📚Here’s an example:
Let’s say you have a risk reward ratio of 1:2 (for every trade you win, you make $2).
But, your winning rate is 20%. So out of 10 trades, you have 8 losing trades and 2 winners.

Let’s do the math…
Total Loss = $1 * 8 = -$8
Total Gain = $2 * 2 = $4
Net loss = -$4

By now I hope you understand the risk reward ratio by itself is a meaningless metric. Instead, you must combine your risk-reward ratio with your winning rate to know whether you’ll make money in the long run (otherwise known as your expectancy).

📍THEREFORE:
The key to success is the combination of the RR and Win Rate in such a fashion that yields a positive return.

📙Example:
🔘If your RR is 1:1 then you start making money with 51% win rate and above.
🔘If your RR is 1:1,5 then you start making money with 41% Win rate and above.
🔘If your RR is 1:2 then you start making money with 34% win rate and above.

🔴The higher the RR the lower is the breakeven Win Rate!

Like, comment and subscribe to boost your trading!

Hey traders, let me know what subject do you want to dive in in the next post?