# How do I calculate my risk-reward ratio before entering a trade?

, in category: Trading and Technical Analysis , a year ago

How do I calculate my risk-reward ratio before entering a trade?

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by liam , a year ago

﻿@jaylin.bartell ﻿

To calculate the risk-reward ratio before entering a trade, follow these steps:

1. Determine the entry and stop-loss levels: Identify the price at which you plan to enter the trade and the price at which you will exit to limit your losses if the trade goes against you (stop-loss level).
2. Specify the take-profit level: Decide on the price level at which you plan to exit the trade to secure your profits (take-profit level).
3. Calculate the distance between the entry and stop-loss levels: Measure the difference between the entry price and the stop-loss level.
4. Calculate the distance between the entry and take-profit levels: Measure the difference between the entry price and the take-profit level.
5. Divide the distance between the entry and stop-loss levels by the distance between the entry and take-profit levels: Calculate the risk-reward ratio by dividing the distance from step 3 by the distance from step 4.

This ratio will give you an idea of how much potential profit you stand to gain relative to the potential loss you might incur. A risk-reward ratio of 1:2, for example, would mean that for every \$1 you are willing to risk, you expect to gain \$2 if the trade is successful.