Hey traders,

Planning your every Forex trade, you should know in advance **the profit **that you are aiming to make and the** maximum amount of money you are willing to lose.**

In this educational article, we will discuss **risk reward ratio **- the tool that is used to compare your potentials losses and profits in Forex trading.

**What is Reward to Risk Ratio**

Let's start with an example. Imagine you see a good buying opportunity on __EURUSD__. You quickly identify a safe entry point, your take profit level and stop loss.

From that trade you are aiming to **make** **100 pips** with a maximum allowable** loss** of **50 pips.**

To calculate a** reward to risk ratio **for this trade, you simply should **divide a potential gain by a potential loss:**

R/R ratio = 100 / 50 = 2

In that particular example, **reward to risk ratio equals 2 **meaning that potential **gain outperform a potential loss by 2.**

Let's take another example.

This time, you decide to short __USDJPY.__

From a desirable entry point, you can get **75 pips rerward** with a** potential loss of 150 pips.**

R/R ratio = 75 / 150 = 0.5

Reward to risk ratio for this trade is **75 divided by 150 or 0.5.**

Such a ratio means that **potential loss outperform a potential gain by 2.**

**Positive and Negative Reward to Risk Ratio**

Risk to reward ratio can be** positive or negative.**

If the ratio is** bigger than 1 **it is considered to be** positive** meaning that a** potential gain outperforms a potential loss.**

R/R ratio > 1

If the ratio is** less than 1**, it is called **negative** so that** potential loss is bigger than potential risk.**

R/R ratio < 1

*On the left chart above, the **reward** for the trade is** bigger** than a risk.*

*Such a trade has *__positive__* reward to risk ratio.*

*On the right chart, the risk is **bigger **than a **reward.*

*This trade has** negative reward to risk ratio.*

**Why?**

Knowing the average risk to reward ratio for your trades, you can objectively calculate the **required win rate** for keeping a **positive trading performance.**

**With R/R ratio = 0.5 **

**2 winning trades** recover** 1 losing trade.**

You need at **least 70% win rate** to cover losses of your trading.

**With R/R ratio = 1**

**1 winning trade, recover 1 losing trade.**

You require at least** 50% win rate **to compensate your losses.

**With R/R ratio = 2**

**1 winning trade recovers 2 losing trades.**

You will need at least **35% win rate** to cover losses of your trading.

*In the example above, the trading setups have *__0.5 reward to risk ratio__*. In such a case, 2 winning trades will be needed to win the money back for 1 losing trade.*

Forex trading involves extremely high risk. Risk to reward ratio is a number one risk management tool for limiting your risks. Calculating that and knowing your win rate, you can objectively decide whether a trade that you are planning to take is **worth taking.**