How to Use Risk Reward Ratio in Forex

The risk/reward ratio is the ratio between the amount of risk (stop loss) and the size of the profit target (reward) that the trader applies. If the trader sets a risk limit of 5%, it is advisable that the profit target is not smaller than the risk allocation. If the risk per transaction is 5%, the trader can target a profit of around 6% or 10%. As with risk, to set a profit target there are no standard provisions. It's okay if the trader only targets a profit of 5%. But keep in mind, don't let the risk become greater than the opportunities the trader has. In other words, it is not wise for a trader to aim for a profit of only 4% while the risk is 5%.

This comparison between risk and potential profit is commonly referred to as the risk or reward ratio. If the trader's transaction risk is 5% but the profit target is 10%, then the risk or reward ratio is 1:2. The important thing to understand in this part of studying money management is to determine the amount of risk first, before finally calculating the profit that the trader will later earn.

How to Determine Risk and Reward in Trading

  • Determination of risk and reward is quite simple. Here are the principles:
  • Risk is calculated from the distance from the entry price to the stop loss price
  • Reward is calculated from the distance of the entry price to the take profit price

The risk and reward ratio is calculated from risk divided by reward or distance to stop loss divided by distance to take profit

Risk is calculated from the distance of the entry price to the stop loss price (red area), while the reward is calculated from the distance of entry to the take profit price (green area). In the opportunity above, the risk offered is 80 pips and the reward is 126 pips.

The risk and reward ratio of this opportunity is 80/126 or 1:1.57. If you are in a position like this, the trader should take a short position. The short position offers a risk and reward of 1:1.57 while the minimum risk and reward that a trader needs is 1:1. With a 50% win rate, all entry opportunities that have a risk and reward of more than 1:1 can be taken by traders.


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