Topic: How to calculate risk/reward ratio in a trade. (Read 82 times)
The 3:1 ratio is quite good but you forget that in trading everything is fast. When your stop loss got hit at $20 loss, you do the same format again with a budget of $80, now how many chances that instead of profiting youll always end up hitting the 20% isnt the reward isnst justifiable enough? I guess its still 1:1 cause your goal of earning $60 is basef on assumption, and mind you that trading isnt easy as that.
You have your own guides on trading and calculation of lose/porift ratio but did you ask yourself how are you going to reach your goal or what will you do when you'll lose $20 dollars from your starting price when your stop lose is at $80?. You can calculate the ratio of profit and lose since you have a target to reach.
That doesn't seem right to me. You are computing the loss/profit ratio and calling it "risk/reward" ratio. But the risk part is not quantifiable. You can't say buying X has 10 units of risk and buying Y has 20 units of risk! Although we can give different assets a level of risk, for example buying bitcoin has medium to low risk while buying altcoins has extremely high risks. And sometimes the reward doesn't justify the investment if the risk is extremely high.
That's the only analogy I would agree with in trading.
That's the only analogy I would agree with in trading.
This is making a very simple thing look complicated. If you are familiar with Khabane or Khaby Lame, you get my point.
The hard part in trading actually is not the computation of risk and reward ratio. Rather, it is the determination of the reward. In your example, you have an entry price of $100 and a profit target of $160. How did you determine the $160? Why not just $130? Why not $140 or $150 or even $200 or $250? Is there a resistance at $165 or $170? Is $160 the targeted peak before the price will correct? Why do you think so? How did you come up with it?
The hard part in trading actually is not the computation of risk and reward ratio. Rather, it is the determination of the reward. In your example, you have an entry price of $100 and a profit target of $160. How did you determine the $160? Why not just $130? Why not $140 or $150 or even $200 or $250? Is there a resistance at $165 or $170? Is $160 the targeted peak before the price will correct? Why do you think so? How did you come up with it?
Investing in cryptocurrencies entails a high amount of risk, yet risk may occasionally be rewarded if you are prepared to accept it. As a result, while considering a cryptocurrency purchase, you should constantly examine the risk-reward ratio as well as the possible profit and loss. It is also vital for those who hold, you cannot simply wake up and purchase any coin because others are buying, risk-reward is extremely important, even institutional investors do it, not just buy dip people usually advise.
If you wish to calculate your risk-reward ratio in a trade, you must first calculate the difference between the price at which you buy a coin and the price at which you want to exit the market if it goes sideways (stop lose).
How to Calculate the Risk-Reward Ratio: Assume you want to acquire coin A.
If your entry price is $100 and you set your stop-loss price at $80, your risk-reward ratio is as follows.
Your risk-to-reward ratio is : $100-$80 = $20.
Your trade has a risk of $20, which implies you are willing to lose $20 if volatility and market sell-off occurs.
To calculate the reward ratio, You only need your entry price and profit target.
For example, if your entry price is $100 and your profit target is $160, your profit reward will be $60.
Your reward ratio now becomes the subtraction of your profit target from the entry price, which is $160 - $100 = $60.
To determine your risk/reward in a trade, divide your profit ratio by your loss ratio.
Which is $60/$20 = 3
Therefore your risk-reward ratio is 3:1
So, if the risk/reward ratio is 3:1, the reward will be three times the magnitude of your loss. If you're ready to make a trade, you should consider the risk-reward ratio to determine whether the risk is worthwhile.
If you wish to calculate your risk-reward ratio in a trade, you must first calculate the difference between the price at which you buy a coin and the price at which you want to exit the market if it goes sideways (stop lose).
How to Calculate the Risk-Reward Ratio: Assume you want to acquire coin A.
If your entry price is $100 and you set your stop-loss price at $80, your risk-reward ratio is as follows.
Your risk-to-reward ratio is : $100-$80 = $20.
Your trade has a risk of $20, which implies you are willing to lose $20 if volatility and market sell-off occurs.
To calculate the reward ratio, You only need your entry price and profit target.
For example, if your entry price is $100 and your profit target is $160, your profit reward will be $60.
Your reward ratio now becomes the subtraction of your profit target from the entry price, which is $160 - $100 = $60.
To determine your risk/reward in a trade, divide your profit ratio by your loss ratio.
Which is $60/$20 = 3
Therefore your risk-reward ratio is 3:1
So, if the risk/reward ratio is 3:1, the reward will be three times the magnitude of your loss. If you're ready to make a trade, you should consider the risk-reward ratio to determine whether the risk is worthwhile.
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