The table below assumes 1 is equal to £100 and you have a win rate of 50% across 10 trades. A positive reward:risk ratio such as 2:1 would dictate that your potential profit is larger than any potential loss, meaning that even if you suffer a losing trade, you only need one winning trade to make you a net profit.īelow we have included a table below to highlight different reward:risk ratios and their impact on your total profits and losses. Most traders aim to not have a reward:risk ratio of less than 1:1 as otherwise their potential losses would be disproportionately higher than any likely profit i.e. It’s important to remember however, that while risk:reward ratios helps to manage your profitability, it doesn’t give you any indication of probability. Therefore, it’s possible that one profitable trade will cover two, three (or more) losing trades. If your profit target is £15 per share, your reward:risk ratio would be 3:1, and so on. Since you’ve risked half the amount of your profit target, your reward:risk ratio is 2:1. In this case then, you’re willing to risk £5 per share to make an expected return of £10 per share after closing your position. You set your stop loss at £15 to ensure that your losses do not exceed £500. You ‘buy’ 100 lots, equivalent to 100 shares, which are priced at £20 for a total position value of £2,000 - on the basis that you believe the share price will reach £30. Let’s say that you decide to go long on ABC shares. Of course there are other aspects which may affect the risk of a trade, such as money management and price volatility but having a solid reward:risk ratio can play a strong role in helping you to manage your trades successfully. Some of the most popular reward:risk ratios are 2:1, 3:1 and 4:1 and these will change depending on the strategy of the trade. To calculate the risk:reward ratio, you divide the amount you stand to lose if the price moves in an unexpected direction (the risk) by the amount of profit you expect to have made when you close your position (the reward.) Why probability is the key to every trading strategyĪ risk:reward ratio is utilised by many traders to compare the expected returns of a trade to the amount of risk undertaken to realise the profit.What are the most popular reward:risk ratios.Why reward:risk probability is important in trading.

Risk probability xbeta