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! 🚀