HI traders,
I have a problem with calculating Risk / Reward.For instance ,I open a position to go long at 1.0400 with a stop at 1.0340 with two profit targets . one at 1.0460 and the other at 1.0520 and I’m planning to move Sl to entry after TP1 hitted and finally my TP2 got triggered .
So I have a position with 60 pips SL and 60 pips TP and the other one with 120 pips profit and no risk.
SO, Can anybody tells me how to calculate the Risk / Reward for that case?
Thanks
R:R is generally considered to mean from the start of the trade, not at some point into it. As such, you’re risking 60p to make 60 on half and 120 on the other. Average the two and you get 90, so R:R is 1.5:1 (90:60).
Really, though, you’re better off thinking in terms of expectancy. For that you need to figure out the odds of your targets being hit vs. getting stopped out. R:R means nothing if you don’t know the odds.
I like that odds were mentioned here. What good is an RR even if it is a good one like 1 risk to 2 reward if you get your stop hit 66% of the time. Odds would show that you are really 1:1. Here are the numbers.
if you believe you are 1:2:
Stop is 30 pips
take profit is 60 pips
On the surface you are looking to make a lot of money here. But what if you only hit 60 pips take profit 33.3% of the time and 30 pips stop 66.6% of the time. Over a hundred trades you break even and likely loose considering the spread and commisions if applicable:
Take profit hit–> 6033 = 1980
Stop Loss hit --> 3067 = 2010
I wanted to add what I stated above.
So the second part to the RR ratio is how advantageous your entry is.
What if my stop loss is 60 pips and my take profit is 30 pips? A 1.0:0.5 risk reward. Not so good right? But what if you only get stopped 10%? What if you incorportate technical signals that allow you to enter a trade at a favorable exhaustion point (such as pivots + an occilator)?
Consider this scenerio of 1000 trade that has a RR of 1.0:0.5:
I get stopped out 10% = 6000 pips
I loose 30 pips 10% based on exit criteria = 3000 pips
I losse 15 pips 10% = 1500 pips
I lose 10 Pips 10% = 1000 pips
I break even 10% = 0
I win 30 pips 50% = 15000
15000 - (6000 + 3000 + 1500 +1000+ 0) = 3500 pips winner. In the scenerio above your win to loss ratio is 50% (break even is condidered a loss after spread and commision in this example) however the average size of the loss to the average size of the winner is 23 pips lossed to 30 pips won. You are on average winning 7 pips per trade. Not great once you factor in spread, but you can see here that if you could hit your take profit 5% more of the time and hit your stop loss 5% less of the time this is how it would look.
I get stopped out 5% = 3000 pips
I loose 30 pips 10% based on exit criteria = 3000 pips
I losse 15 pips 10% = 1500 pips
I lose 10 Pips 10% = 1000 pips
I break even 10% = 0
I win 30 pips 55% = 16500
16500 - (3000 + 3000 + 1500 +1000+ 0) = 8000 pips winner
You are still at the same 1.0:0.5 RR. Your W/L ratio is 55%/45%. Your avg loss is 17pips and your avg winner is 30. Now you an avg of 13 pips win per trade.
The RR ratio by itself is an arbitrary ratio and should not be considered in itself as an indicator for success. If you combine it with a system that has advantageous entry points and a W/L ratio that is over 50% then your RR can be at or under 1:1.