Calculating the risk/reward ratio

The main difference between an amateur trader and a professional one is that the latter always aims to know and manage his portfolio's risks.

The risk/reward ratio is used by many forex traders to assess the expected return and the risk of a trade.

For example, if a trader buys EUR/USD at 1.3500 and places his stop-loss order at 1.3450 and his take profit at 1.3650, he's risking 50 pips for a potential profit of 150 pips.

The risk/reward ratio is therefore 150/50 = 3.

A risk reward ratio of 3:1 statistically provides a trader with a greater likelyhood of being profitable in the long term.

A trader can lose 2 out of 3 trades and still make money!

Proper money management also requires that a trader calculate the financial risk in terms of the capital that's available in one's account. To do this, you must calculate the value of each pip and determine the lot size according to your profit target and stop-loss levels.

Risk/reward ratio calculator

Fill in the price, stop and profit target fields