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The reward-to-risk ratio (RRR) measures a trade’s potential returns against its predetermined risk of loss.

The ratio is computed by dividing the profit that a trade is expected to yield by the loss that the trade may incur.

For example, let’s say that you expect to make $100 by buying EUR/USD.

If you place your stop-loss in such a way that you stand to lose just $25, your trade’s reward-to-risk ratio is 4:1 (100 / 25).

How to Measure Reward-to-Risk (RRR)

It’s a simple 4-step process:

  1. Evaluate the potential price levels for your stop loss (SL) and profit target (PT)
  2. Measure the distance between your entry and your stop loss (SL). This is your “Potential Risk
  3. Measure the distance between your entry and your profit target (PT). This is your “Potential Reward“.
  4. Divide the two: Potential Reward / Potential Risk