The risk/reward ratio can help understand how much a trader or investor can earn, for every dollar risked on an investment. 💰
To calculate the risk/reward, you need to divide the amount you stand to lose if your investment does not perform as expected (the risk) by the amount you stand to gain if it does (the reward).
🧠 Understanding your risk/reward is a critical part of your trading plan. If you have a solid risk/reward goal, then you can easily identify how often you have to be correct on your trades to be a profitable trader overall.
🔢 The formula for the risk/return ratio is:
“Risk/Return Ratio = Potential Loss / Potential Gain”
Here’s an example using real money...💵
For any given trade or investment, if the potential gain is $1,000 and the possible loss is $500, the risk-reward ratio would be 2:1 ($1,000/$500).
Let us know if you have any questions or thoughts by dropping a comment! 💭 |
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