For example if I am risking $50 on a trade and hope to potentially take profit at $100 (2:1 RR) but eventually I make a loss of -$25. Now that I have made a loss, what is my risk reward ratio for the trade?
Risk:reward ratio is written as r:r.
The risk is always 1, whatever amount of money you put at risk in the trade, this is counted as 1. The reward is how many times bigger than the risk is the money you actually make from the trade. So if you make the same amount of profit as you risked, both risk and reward are equal and r:r is 1:1.
When planning your trade, the r:r is theoretical. After your trade is finished, you must use any actual number involved. In your example of a completed trade, your loss was $25 and you intended to take profit at +$100, so your r:r is 1:4.
The loss would be 0.5R
Or 50% loss on the total risk taken.
These are not bad losses - if I lose 0.5R on a trade Iām quite happy.
Thar is my take on it anyway
I think I disagree with this statement. The $100 is hypothetical profit. The -$25 is actual loss. So, how can both of them enter into the equation. I was thinking that since it is risk/reward, then $50/-$25 which gives 1:-0.5. Maybe I am wrong, but that is the confusion I am having.
r: r stands for risk:reward. The risk r is always first and is always 1. Both numbers are always positive.
At the point you plan the trade and open the trade both numbers are hypothetical and these are the numbers you use in your r:r calculation. so if you have a SL at $50 down and a TP at $100 up, your r:r is 1:2 - never write this as 2:1.
Once the trade has been closed at a loss of $25, it doesnāt matter what your planned SL was, the trade is closed so -$50 SL is irrelevant: your realised risk is $25 and that has a risk value of 1.
But your planned TP is still $100. This does not change simply because you moved your SL. So the r:r for the closed trade is 25:100 which is 1:4.
There is no risk reward for a loser, itās just risk realised.
Maybe I differ from @tommor in my definition - but in your example you lost half what your risked making it 50% of trade risk.
The potential profit doesnāt come into it
@tommor, thanks for your answer. But I am still confused. I am trying to use the rr to calculate my expectancy. If I put in this rr as 4r, that would make my expectancy high which is false. So, how would I factor in this loss and its rr into my expectancy calculation where expectancy = (rr x win rate) - (1 - win rate). So, if I put in this 4 in the expectancy calculation, it will influence my rr in the positive side, instead of the negative side since this is a loss. Do you now get my confusion based on your explanation? I was thinking that based on the example I gave, the rr should be negative? Please help me clarify the confusion.
@Johnscott31, so how would this factor into the expectancy calculation of expectancy = (rr x win rate) - (1 - winrate). thanks
Lol - now you got me I just trade the charts and leave the higher math to someone else!!!
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You can never have a negative r:r.
When you open a buy trade, its because you see a probability that price will go up. You set your TP where you think price will probably rise to. Where price will probably rise to does not change simply because you change where you put your SL.
You simply divide your net profit (the reward) by the price of your maximum risk.
So in your example it is (-25)/50
or -1:2
or you can go a bit further as the risk reward metric will only really help you if you know your win rate (expectancy).
(source for below: The Complete Guide to Risk Reward Ratio)
E= [1+ (W/L)] x P ā 1
Where:
W means the size of your average win
L means the size of your average loss
P means winning rate
Hereās an example:
You made 10 trades. 6 were winning trades and 4 were losing trades.
This means your percentage win ratio is 6/10 or 60%.
If your 6 winners brought you a profit of $3,000, then your average win is $3,000/6 = $500.
If your 4 losers were $1,600, then your average loss is $1,600/4 = $400.
Next, apply these figures to the expectancy formula:
E= [1+ (500/400)] x 0.6 ā 1 = 0.35 or 35%.
In this example, the expectancy of your trading strategy is 35% (a positive expectancy).
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Thanks. I should use this formula instead of the one I found online. It factors in my losses better than using RR which is somewhat confusing.
Whatās your answer to the question in the first post?
Upon reflection I am wrong. I didnāt think through the calculation (and appears the Investopedia link has the ratio back to front). So therefore you are right.
net profit/max riskā¦ so 50/50 or 1:1 in the OPs example.
Obviously this would be influenced by stop loses and the āriskedā amount would be varied (and normally from what I see expressed in pips).
I would need some convincing from you though on your commentā¦
In your example of a completed trade, your loss was $25 and you intended to take profit at +$100, so your r:r is 1:4.
as this would imply from every $1 risked he made $4ās return (when in fact for every dollar risked in this example he lost 50 cents). You could express that as 2:1 (if holding the risk/reward ratio convention in terms of risk number has to come first - therefore for every $2 risked you get $1 back.
My lesson is I need to be little bit more deliberate in my responses.
Thanks @OdinsMandate.
Both a planned (hypothetical) r:r and an actual realised r:r are treated in the same way - the first r is risk and is always normalised to 1.
So the r:r is always expressed as 1:X. X is the reward, expressed as $ reward / $ risk, whether it is the planned reward or the actual reward realised.
So if a completed trade sustained a loss of $25, and the TP was at +$100, the r:r is 25:100 = 1:4. From the closure of the trade, it is now irrelevant where an original SL might have been, this is superceded by the actual exit price and loss to the account.
So the r:r for the completed trade with a $25 loss and a $100 TP is 1:4.
The original plan for a $50 SL and a $100 TP (which would have had a r:r of 1:2) is void. That plan was never executed.
Where does the 50 cents come from?
Now, we cannot agree on the calculation when a loss is made for RR. That was the dilemma I faced when I was calculating RR. I searched on google and nobody explained it very well. I guess everyone thinks that calculating RR is based on winnings when losing is a fundamental truth in trading. Well. I will use the second formula for expectancy as given here.
Without getting into a debate over the calculations I will outline how I see the OPs trade (big picture).
If 1:2 means basically for every $1 risked the reward is $2 (and in an ideal world we want that second number in the ratio to be as high as possible) how can you say losing money on the trade gives you a better risk to reward ratio? (which is what I assume you are saying when you say losing $25 gives a 1:4)
Planned Trade - High Level (way I am interpreting it)
$50 put into trade
$100 set as take profit
Balance = $150 (based on your 1:2 risk return)
Outcome
$50 put into trade
$25 lost
Balance = $25
Therefore based on your statement risk is set to 1 by definition to get to $25 balance (i.e. show the $25 loss) your āreturnā is negative - so a Risk:Reward ratio of 1:0.5
For every $1 risked your return is 50 cents
Iāve already explained what risk:reward means and how to calculate it. I donāt see any āprofitā in simply saying the same thing again and you might think Iām just being obtuse.
I agree we should probably just leave it here and please donāt think I was trying to be argumentative. I am just not seeing or itās not clicking how the numbers stack up. I am new so perhaps missing something.
Have a good night and thanks for the chat 
Hey, the English educational system is cr@p at languages, the US educational system is cr@p at maths.
In any event what weāre looking for here isnāt to know most its to make a profit. Trading is either cursed or blessed in the sense that unlike almost every other profession, the people who make most are not necessarily those who know most.
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