RRR Calculations For Money Management
When you are doing forex trading in the forex market or other markets or investing, we often hear about general money management strategies. This strategy requires that the level of profit (reward) should be more than the risk level of loss per transaction.
Many investors use RRR to compare the expected investment returns with the amount of risk taken in order to obtain these benefits. This ratio is calculated mathematically by dividing the amount of losses that traders can accept if the price moves in the opposite direction (risk) with the amount of profit trader expected after the exit position (reward).
Risk Reward Ratio (Ratio of Profit Rate to Risk Level)
RRR refers to the average profit size compared to the average loss size per transaction. For example, if the expected profit is $ 900 and the acceptable loss is $ 300 for a given transaction, then the RRR is 3: 1 ~ $ 900: $ 300.
Many reference trading books and “mentors” recommend a RRR level of at least 2: 1, or 3: 1. This means that for every $ 200 or $ 300 profit you expect per trading, you should set up potential losses at $ 100.
This RRR starts from the theory or logic that should the potential losses be kept as small as possible and every potential profit becomes possible. Although in practice not always. However, this RRR concept is easy to understand even for the novice trader.
The application of this RRR to the forex market is the placement of stop loss and take profit levels. When you are trading BUY EURUSD at 1.18000 level and you want to use RRR 2: 1 then you will place stop loss level with 30 pips distance so take profit level is 60 pips. Or with another example of RRR 3: 1, you place a stop loss level 50 pips away from your entry level then your take profit level is 150 pips. Yes, it’s that simple.
Another logic is if in 10 times your transaction hit the stop loss level 5 times and hit the level of take profit 5 times then you still have the advantage. Transaction loss 5 x 30 pips = 150 pips (loss) and profit transaction 5 x 60 pips = 300 pips. Overall, you still have a profit of 300 pips – 150 pips = 150 pips.