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Risk/Reward Ratio

Technical Analysis

The risk/reward ratio compares the potential loss you accept on a trade with the potential gain you target.

The distance from entry to the stop level is the risk, and the distance from entry to the target is the reward. The ratio alone does not tell you whether a trade is good, because it ignores the probability of reaching the target: a 1 to 3 ratio can still lose money if the target is rarely hit.

Example

  1. 01Stop$95
  2. 02Entry$100
  3. 03Target$115

$5

Risk

$15

Reward

1 to 3

Ratio

If you enter at $100 with a stop at $95 and a target at $115, the risk is $5, the reward $15, and the ratio 1 to 3.

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