How Reward:Risk Is Calculated
What is Reward:Risk (R:R)? 📊
The Reward:Risk (R:R) ratio measures the potential reward for every unit of risk in a trade. It’s an essential tool for traders to analyze the profitability and risk involved in their strategies.
"The risk/reward ratio marks the prospective reward an investor can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns."
— Investopedia
How Is R:R Calculated in Trading Vault?
Trading Vault provides three methods for calculating R:R ratios, ensuring flexibility for traders with different preferences. These methods can be configured in the app's settings.
Method 1: Pip Reward:Risk
This method focuses purely on price movements, ignoring monetary or account-related risk.
Formula:Reward = Pip Reward / Pip Risk
If you enter a target price, Trading Vault can calculate your Target R:R using the same method, allowing you to compare it to your actual R:R.
Method 2: Profit Reward:Risk
This method incorporates the actual monetary values, including profit and risk.
Formula:Reward = Net Profit / Financial Risk
where:
Net Profit = Gross + Commission + Roll + Dividends
Financial Risk = Pip Risked * Cost per pip
Cost per pip = Gross Profit / Pips Gained (Loss)
Method 3: Profit Reward:Risk with Commissions Included
This method expands on the Profit R:R by including broker commissions in the risk calculation.
Formula:
Reward = Net Profit / Financial Risk
where:
Net Profit = Gross + Commission + Roll + Dividends
Financial Risk = (Pip Risked * Cost per pip) + Commissions
Cost per pip = Gross Profit / Pips Gained (Loss)
Why Multiple Methods?
Each trader has a unique approach to defining and assessing risk. By offering multiple methods, Trading Vault ensures you can calculate R:R in the way that aligns best with your trading style.
Conclusion
Understanding and customizing how R:R is calculated can improve your trade analysis and decision-making. Configure your preferred method in Trading Vault settings and start optimizing your trading strategy today! 🚀