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Risk Reward Ratio Indicator
The Risk Reward Ratio Indicator enables traders to determine the level of exposure to risk and its reward.
CATEGORIES: MT4, INFORMATIONAL
Updated on: 26.10.2023
The key to becoming a successful, profitable trader is in risk management. The best way to manage trading risk in forex is applying the Risk to Reward Ratio (RRR).
As important as this risk management is, many traders have difficulty in calculating it. This difficulty is eliminated using the Risk Reward Ratio Indicator.
The Foundation
The Risk Reward Ratio Indicator enables traders to determine the level of exposure to risk and its reward. This indicator is displayed on the main chart as a ratio as seen in the diagram below:
From the EUR/JPY H1 chart above, the RRR as displayed by the indicator is 1:1.94. The first number (1) is the risk, while the second number (1.94) is the reward.
In addition to this, the indicator displays three horizontal lines. The first line is the take-profit price level (green horizontal line). The second line is the stop loss price level (red horizontal line). Finally, the third line displayed on the chart (grey horizontal line) is the bid price.
The Risk Reward Ratio Indicator for MT4 is calculated using the following method:
The risk is the differences between the entry and the stop loss in trade.
For long trades, risk = Entry price – SL
For short trade, risk = SL – entry price
The reward is the difference between the entry and TP.
For long trades, reward = TP – Entry
For short trades, the reward is Entry – TP.
The RRR is the reward divided by the risk (reward/risk).
For example, if you entered USD/JPY long trade at 125.22, and you set your SL and TP to 122.11 and 128.54 respectively, since it’s a buy trade, your risk is
Entry – SL= 125.22-122.11= 3.11
Your reward is
TP- Entry= 128.54-125.22 = 3.32.
Risk is 3.11 and the reward is 3.32.
RRR = reward/risk = 3.32/3.11 = 1.1
Therefore, RRR = 1:1.1
Save time withd software.
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