Risk Reward Indicator

Description

Effective risk management is essential to becoming a profitable and successful trader. Using the Risk to Reward Ratio (RRR) is the most effective method of managing trading risk in forex.

Even though this risk management is crucial, many traders find it hard to calculate. The Risk Reward Indicator (RR) removes this challenge.

The Basis of the Risk Reward Indicator

Traders can ascertain the degree of risk exposure and its benefit by using the Risk benefit Indicator. The diagram below illustrates how this indicator is shown as a ratio on the main chart:

According to the EUR/USD H1 chart above, the indicator’s RRR is 1:3.76. The danger is represented by the first number (1), and the reward by the second number (3.76).

The indicator further shows three horizontal lines. The take-profit price level (green horizontal line) is the first line. The stop loss price level (red horizontal line) is the second line. Lastly, the entry price is shown as the third line (blue horizontal line) on the chart.

The following formula is used to determine the RR Indicator for MT5:

The distinctions between a trade’s entrance and stop loss represent the risk.

• Risk Calculation:

  • Long Trade: Risk = Entry Price – Stop Loss (SL)

  • Short Trade: Risk = Stop Loss (SL) – Entry Price

• Reward Calculation:

  • Long Trade: Reward = Take Profit (TP) – Entry Price

  • Short Trade: Reward = Entry Price – Take Profit (TP)

The RRR is calculated by dividing the return by the risk.

Since it’s a buy trade, for instance, if you made a EUR/USD long trade at 1.07985 and set your SL and TP at 1.07922 and 1.08222, respectively, your risk is

Risk = Entry – SL = 1.07985-1.07922 = 0.00063

Your reward is

• Reward = TP – Entry= 1.08222-1.07985 = 0.00237
• Risk is 0.0063 and the reward is 0.00237
• RRR = reward/risk = 0.00237/0.0063 = 3.76
• Therefore, RRR = 1:3.76.

Traders can distinguish between profitable and unsuccessful deals using this indicator. A risk-to-reward ratio of at least 1:2 indicates a good trade. Conversely, bad transactions will have an RRR value below 1:2.

If you incur a risk of 1, your profit will be double your risk, according to the 1:2 RRR. Additionally, if you take a risk of 1, you will receive three times your risk in return. This indicates that your profit will be 3×30 pips, or 90 pips for a 1:3 ratio, assuming your SL is 30 pips. Your profit for 1:2 will be 30×2 = 60 pips if your SL is 30 pips.

Risk Reward Indicator is therefore crucial for evaluating your risk to reward ratio prior to initiating any trades.

Conclusion

For all forex traders, the Risk Reward Indicator for MT5 is a very helpful tool. With the use of this indicator, traders may ascertain their level of risk exposure in the event that the price goes against them as well as their return in the event that it moves in their favor.