In the world of trading, it is impossible to achieve a stable profit if you do not adhere to the Risk/Profit formula. The risk-reward ratio allows you to understand how much risk to take for potential reward. In other words, it shows you what your potential return is for every dollar you risk on an investment.
To determine profit risk, set profit targets and stop loss before entering a trade. Now you have your entry and exit targets, meaning you can calculate your risk/reward ratio. To do this, you need to divide the potential risk by the potential profit.
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📊 Example of calculating risk profit
Let's say you want to go long at $BTC You perform an analysis and determine that your take profit order will be +6.86% of the entry price.
Next, you must answer the following question: where to place a stop loss to limit losses. In this case, you decide that your stop will be -1.74% of your entry point.
It's worth noting that they generally should not be based on arbitrary percentage numbers. The profit target and stop loss must be determined based on market analysis. Technical analysis indicators are very useful to solve this problem.
So, our profit target is +6.86%, and the potential loss is -1.74%. What is the risk/reward ratio? 1.74/6.86 = 1 to 3.94.
If a trading position has a low risk/reward ratio, it's probably not worth arguing with the numbers and hoping for success. In this case, we recommend choosing another position with a good risk-reward ratio.
📌 When trading, the optimal profit risk is at least 1 to 3, and even if most of the trades follow the stop order, the total profit will be positive due to the correct profit risk. So, for example, with a risk profit of 1 in 10, only 1 out of 10 positively worked out transactions is enough to already be in the black for the portfolio, when the remaining 8 can easily fall through the stop order.
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