๐ Profit/Risk Ratio - What is it and how to use it?
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Professional traders use the profit/risk ratio to estimate possible profits versus possible losses. In order to understand what the profit/risk ratio is, traders need to determine potential profits and potential losses. The potential risk is the difference between the entry point of the position and the stop loss order.
๐ If you buy Bitcoin at $6900, place a stop loss order at $6800, and take profit at $7200, the risk is $100 ($6900 - $6800) and the profit is $300 ($7200 - $6900).
Comparing the risk to the possible profit gives the ratio: Risk/Profit = $300/$100 = 3
If the ratio is greater than 1.0, the profit is greater than the potential loss.
๐ Letโs use statistics.
The table below shows the relationship between the probability of losing your entire deposit and the accuracy of your trades and the profit/risk ratio of each trade. So, we can see that even if your strategy is only 60% accurate, but at the same time has a profit/risk ratio of at least 1.5:1, you are already guaranteed not to lose your entire capital. But if the ratio is 1:1 and the accuracy is also 60%, then the probability of losing your deposit in a series of unprofitable trades is already 12%**
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Professional traders use the profit/risk ratio to estimate possible profits versus possible losses. In order to understand what the profit/risk ratio is, traders need to determine potential profits and potential losses. The potential risk is the difference between the entry point of the position and the stop loss order.
๐ If you buy Bitcoin at $6900, place a stop loss order at $6800, and take profit at $7200, the risk is $100 ($6900 - $6800) and the profit is $300 ($7200 - $6900).
Comparing the risk to the possible profit gives the ratio: Risk/Profit = $300/$100 = 3
If the ratio is greater than 1.0, the profit is greater than the potential loss.
๐ Letโs use statistics.
The table below shows the relationship between the probability of losing your entire deposit and the accuracy of your trades and the profit/risk ratio of each trade. So, we can see that even if your strategy is only 60% accurate, but at the same time has a profit/risk ratio of at least 1.5:1, you are already guaranteed not to lose your entire capital. But if the ratio is 1:1 and the accuracy is also 60%, then the probability of losing your deposit in a series of unprofitable trades is already 12%**