All About Risk to Reward Ratio in Synthetic Indices

The risk to reward ratio, sometimes known as the "RRR," compares the potential profit of a trade to its potential loss. It is a calculation that uses the difference between the entry point of a trade and the stop-loss order to determine risk and the difference between the profit target and the entry point to find reward.

To calculate the risk to reward ratio, start by figuring out both the risk and the reward. Both of these levels are set by the trader.

Risk is the total potential loss, established by a stop-loss order. It is the difference between the entry point for the trade and the stop-loss order.

Reward is the total potential profit, established by a profit target. This is the point at which a security is sold. The reward is the total amount you could gain from the trade. It is the difference between the profit target and the entry point.

The risk to reward ratio is the relationship between these two numbers: the risk divided by the reward.

If the ratio is great than 1.0, the potential risk is greater than the potential reward on the trade. If the ratio is less than 1.0, the potential profit is greater than the potential loss.1

Learn how to calculate the RRR, why it is used, and how it works in this video.