What is the Risk-Reward Ratio?
The risk/reward ratio shows the potential reward an investor can earn for each dollar of investment risked. Many investors use the risk/reward ratio to compare the expected return of an investment with the level of risk they must accept to achieve that return. A lower risk/reward ratio is often preferred because it signals less risk for an equivalent potential return.
What is the Risk-Reward Ratio in Trading?
In Trading the risk-reward ratio is almost similar but has a little difference. A trader always thinks about putting low risk to gain much profits. How much risk a trader can take to make profits is called the Risk/Reward ratio. For example, if a trader has 100 dollars in his account and he does a trade and risks 5 dollars. That means he puts a risk 5% of his capital. If he targets his profit at 5 dollars then the risk-reward ratio will be 1:1. Because he risks the same amount of money that he wants in return.
Different types of Risk-Reward ratio
There are a lot of ways that you can calculate the Risk/Reward ratio. The ideal or you can say the most popular Risk/Reward ratio is 1:2 or 1:3. It can be higher or lower. The higher the reward ratio than the risk, the lower the chances of winning. Because the market has to complete that target. With a lower reward ratio than the risk, there is a high chance of winning. But there are other factors too. Like if the reward ratio is higher than the risk. Then there will be a high chance of recovering previous losses. But if your reward ratio is lower or equal to the risk then you need to win more trades to gain profits. It totally depends on the trader. What types of trading does he do and what strategy does he use?
Risk-reward ratio according to types of Trading
There are a lot of traders and their trading style is totally different from one another. So their Risk/Reward ratio is also different. Those who are day traders. Most of them do trading with a 1:2 Risk/Reward ratio. The swing trader uses their Risk/Reward ratio differently. As you know a swing trader catches the swing of the market and then trades. So it could be more than 1:2. A scalper trader trades for a short time. But he takes multiple trades a day. So there is a high chance of risk. That’s why a scalper is always comfortable with choosing a 1:1 Risk/Reward ratio. So, it depends on what type of trading you actually do.
Risk-Reward Ratio According to Strategies
Besides, the type of trading is another factor that is also very important to calculate your Risk/Reward ratio which is what strategy you use. There are a lot of strategies that give you a 1:1, 1:2, or 1:3 ratio. But there are also some secret strategies that give you a 1:4 or sometimes more than 1:4 risk/reward ratio. And you can also apply these strategies in your trading.
VSSNR (Very Strong Support and Resistance)
There is no strategy that gives you 100% results. If it does so. Everyone would be a millionaire. With these strategies, you have to be patient and control your emotions, risk management, and money management. But this strategy will help you a lot to increase your winning potential. As it has a high reward ratio. It will recover your previous losing trades. After losing 2 or 3 trades consecutively only one winning trade helps you to recover all of your losses.
Risk-reward ratio according to the broker
Maybe you are surprised to hear how broker plays an important role in the Risk/Reward ratio. Many people even don’t know the facts. Every broker has a spread system. What is spread?
Spread
An exchange rate spread is the difference between the exchange rate at which a broker sells a currency and the rate at which a broker buys that currency. So spread plays an important role in trading because when you buy or sell any asset if there is a high spread then there will be a high chance to touch your stop loss and the trade close. There are a lot of brokers who have very high spreads which is very bad for trading. It makes your trade unexpected losses. There are some trading brokers who give very low spread or some of them give you no spread at all. These are the brokers.
Conclusion
With a good Risk/Reward ratio, your winning chances will be very high. But with proper money management, Risk management, Emotion control, patience, FOMO, and revenge trading. These are the key factors of a successful trader. You have to develop these qualities in you to become a successful trader.