How do you compute risk:reward ratio?

Hi guys,

Another newbie question.

I read about risk:reward ratios everywhere but I can't figure out how to actually compute one for a given trade.

For example, say I want to enter a trade on the EURUSD currency pair with a risk:reward ratio of 1:3 (or 3:1 - which direction does it go? - either way, I mean higher reward than risk). I have an account with $1,000 margin available (brand new account - no other trades of any kind made yet - just to keep everything nice and simple).

I want to risk 1 micro lot. So I enter the market at 1.4740 with an $100 (1 micro lot) buy and the expectation that the market will rise.

How do I compute the risk:reward ratio on this trade?

Am I missing numbers need for the computation? What other numbers do I need to complete the computation?

Once I can figure out the full equation, I think I'll have a much better understanding of how this works.

Much thanks!

Risk reward means that whatever your Stop Loss is, your Take Profit should be 3x that.

So if I risk losing 10 dollars, I should be trying to gain 30.

That's it?

No wonder I was having such a hard time. Overcomplicating things!!

Thanks logiktrader!

Hi Iggy,

It's good that you are taking good money management rule in your trading. But sometimes when the market conditions do not allow a 1:3 risk to reward ratio, then you might have to settle for a 1:2, depending on your trading plan.

The point is that you need to have a higher reward than risk so that one winning trade can cover for at least 2 lost trades.

Regards,
Dan

You should also try getting your risk:reward towards infinity.
It's quite easy. Set your Stop (that is your risk) and don't use a Take Profit and just trail your stop and lock in profit. This way you will not kill your trade when there is potential for 100 Pips more. And your losers will be small in comparison to. And it will feel very good when the onyl thing you have to do is lock in and secure new profit. This way it's hard not to make any money in the markets.
The trick is trailing your stop in a way that it won't get stopped out by a spike and still have potential to go even lower/higher. If you master this you have a powerfull trading skill.