Risk/Reward Ratios and Hit Rate
Not every trade will go exactly to plan. But calculating a risk-reward ratio for any new position will help you prepare for surprises – and respond strategically. We’ll explain the simple rules behind RRR to help you manage risks and better sustain long-term profitability.
Measuring your trading success
When you first begin Forex trading its vital that you expand your knowledge of trading fundamentals.
These include macroeconomic analysis, technical analysis, charting, and an understanding of the psychological impacts of trading. It’s also critical that you develop an approach to managing risk.
Understanding risk comes from an appreciation of the different metrics that measure the success of a given trading strategy or system.
Analysing different measures of trading success makes it possible to improve the results of any trading system or strategy, heightening profit potential and the returns from assets under management.
In this section, we’ll look at two of the key metrics that you can easily measure and analyse in to improve your understanding of trading performance and the effectiveness of your overall strategy.
- The Risk/ Reward Rate
- The Hit Rate
We’ll also look at how both can be combined and analysed.
Risk/Reward Ratio defined
The Risk/Reward Ratio is a measure of the potential reward or profit that a trader or investor can expect from any given investment in terms of the potential risk of loss.
It should be noted that any calculation is based on some hypothetical inputs. You can have a good idea of your potential risk by establishing a stop-loss (see our article on stop-losses here). The potential reward or profit is only a projected expectation before the trade or investment has even been entered into.