The reward-to-risk ratio (RRR) measures a trade’s potential returns against its predetermined risk of loss.
The ratio is computed by dividing the profit that a trade is expected to yield by the loss that the trade may incur.
For example, let’s say that you expect to make $100 by buying EUR/USD.
If you place your stop-loss in such a way that you stand to lose just $25, your trade’s reward-to-risk ratio is 4:1 (100 / 25).
How to Measure Reward-to-Risk (RRR)
It’s a simple 4-step process:
- Evaluate the potential price levels for your stop loss (SL) and profit target (PT)
- Measure the distance between your entry and your stop loss (SL). This is your “Potential Risk“
- Measure the distance between your entry and your profit target (PT). This is your “Potential Reward“.
- Divide the two: Potential Reward / Potential Risk
FAQs
RRR = (Potential Profit) / (Potential Loss)
What is the risk ratio RRR? ›
Relative risk reduction (RRR) is a convenient way of re-expressing a risk ratio as a percentage reduction: RRR = 100% × (1 – RR). For example, a risk ratio of 0.75 translates to a relative risk reduction of 25%, as in the example above.
What is a good rrr? ›
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.
What is a good reward to risk ratio? ›
To increase your chances of profitability, you want to trade when you have the potential to make 3 times more than you are risking. If you give yourself a 3:1 reward-to-risk ratio, you have a significantly greater chance of ending up profitable in the long run.
Is a 1.5 risk reward ratio good? ›
The 1.5 Risk-Reward Ratio: Balancing Risk and Reward
A commonly cited benchmark in trading is the 1.5 risk-reward ratio. This ratio suggests that for every unit of risk taken (usually measured as a percentage or dollar amount), an investor should aim for a potential reward that is one and a half times greater.
Is a high RRR good? ›
The inherent risks of an investment or project are determined through its required rate of return, and thus, a high RRR indicates higher risks while a low RRR implies minimal risks.
What is a high RRR? ›
✅ A higher RRR indicates that an investment or project is riskier, and therefore, investors demand a higher return to compensate for the higher risk.
What does RRR tell you? ›
Relative risk reduction (RRR) tells you by how much the treatment reduced the risk of bad outcomes relative to the control group who did not have the treatment.
What is the reward-to-risk ratio RRR? ›
RRR is the ratio of the potential profit of a trade to the amount of risk you are willing to take. The lot size you choose for a trade can significantly affect your RRR. A smaller lot size means you are risking less money on the trade, which reduces your potential profit.
How do you interpret RRR and ARR? ›
RRR is usually constant across a range of absolute risks. But the ARR is higher and the NNT lower in people with higher absolute risks. If a person's AR of stroke, estimated from his age and other risk factors, is 0.25 without treatment but falls to 0.20 with treatment, the ARR is 25% – 20% = 5%.
Using Pinescript to create custom Risk Reward Ratio (RRR) boxes with custom vertical time markers to help traders stay mindful of how long they've been in a trade. //Usage: -Add indicator to chart and you'll be prompted to click three times: -- 1: Choose time (clicking last bar will mark entry as current candle's open) ...
What is a 2.3 risk reward ratio? ›
If you have a win percentage of 30% then to break even you would need your average winner to be 2.3 times the size of your average loser. (Risk/Reward = 2.3) Therefore, if your anticipated win percentage is 30% do not take any trade unless your potential risk/reward is larger than this.
What is a 1 to 5 RR? ›
This ratio approximates the reward that an investor may earn against the risk that they are willing to invest. It is presented in price form; for example, a risk/reward ratio of 1:5 means that an investor will risk $1 for the potential earning of $5. This is known as the expected return.
What is the win rate for 1 2 RR? ›
A 1:2 RR Ratio means that for every one currency unit risked, you expect to win two units.
What is the maximum RR ratio? ›
The risk-to-reward ratio can be less than 0.3, but taking a higher risk reduces your chances of profit, whereas taking a lower risk does not always result in a decent profit. A maximum risk/reward ratio of 0.5 is recommended. With this ratio, you have a better chance of profitability.
What does 1 3 RR mean? ›
A risk-reward ratio of 1-to-3, for example, would signify that for every dollar risked, there's a $3 potential profit or reward. Investors use risk-reward ratios to help them determine which investments to make. Specifically, investors use the risk-reward ratio to determine the viability of a given investment.
What is RRR ratio? ›
Residual-resistivity ratio (also known as Residual-resistance ratio or just RRR) is usually defined as the ratio of the resistivity of a material at room temperature and at 0 K. Of course, 0 K can never be reached in practice so some estimation is usually made.
How to interpret rrr? ›
This interpretation of risk reduction in the context of baseline risk is termed as “relative risk reduction (RRR).” RRR = ARR/risk in control group (baseline risk). RRR is an estimate of the percentage of baseline risk that is removed as a result of the new therapy.
What does a risk ratio of 1.5 mean? ›
A risk ratio greater than 1.0 indicates a positive association, or increased risk for developing the health outcome in the exposed group. A risk ratio of 1.5 indicates that the exposed group has 1.5 times the risk of having the outcome as compared to the unexposed group.
