The risk/profit ratio is a fundamental concept that is applied by those who trade. This ratio allows us to determine the deal that gives us the opportunity to win more than lose. In this article, we will call it R/R.

The R/R ratio is one of the many risk management concepts proposed by traders. We will tell you in detail how to calculate it and how to use it.

**The difference between the R ratio and the risk-reward ratio (R/R)**

First of all, it should be noted that many traders use the R coefficient, or the profit-to-risk ratio (reward/risk), which is the opposite of the risk-to-benefit ratio (risk/reward). Often, due to misuse, R is called the risk-reward ratio. This is the ratio that is displayed in TradingView when evaluating a trade.

**How to calculate the R/R ratio?**

The R/R ratio is obtained as a result of a fairly simple calculation. As mentioned above, this is the ratio between the potential loss from the transaction and its potential profit.

**Explanation of the risk-reward ratio**

In our example, we invest $1,000. It is assumed that the price of Bitcoin will rise.

- The entry point is at $28,989 per BTC. The price at which he buys BTC is also called the opening price;
- The target price or take profit is $30,390. This is the target price at which he hopes to sell his asset;
- The stop loss is set at $28,660. This is the cancellation point, where he closes the position and sells his asset at a loss if the price reaches this point.

These last two levels are determined from the very beginning when setting up a trade. These are orders placed in advance on the exchange and executed automatically depending on the direction of the Bitcoin price.

In such situations, traders often rely on strategies like **price rejection trading strategy** to confirm their trade setups. Price rejection occurs when the price approaches a significant level (in this case, the stop-loss or target) but fails to break through it and reverses direction. This strategy helps traders better time their entries and exits, potentially improving the R/R ratio by providing more accurate signals for placing stop-losses and take-profits.

**How to use the R/R ratio correctly?**

The installation analysis should determine your results. R/R is only a consequence of this analysis.

If the R/R favors the trading plan, the deal should be considered. If this is not the case, it will take patience to find a more favorable situation.

This risk management element should be associated with a win rate (success rate). This is the number of winning trades compared to the number of losing trades. In order for a trader to be profitable, the higher his win rate, the lower he can afford to have R/R.

These two concepts of risk management are actually very interrelated. The lower the risk-reward ratio, the lower the win rate may be, and vice versa. For example, a trader with an estimated success rate of 30% may be more profitable than a trader with a 70% success rate. Then everything will depend on the ratio set by the setting.

**What is the optimal risk-reward ratio?**

The goal of every trader is to optimize their profits, market conditions are changing by definition. As a result, the win rate, which allows us to determine whether R/R is favorable, also fluctuates.

The win rate depends on many factors, for example:

- trading technique;
- time scale (timeframe);
- market direction (trend)
- external events.

If there is a trade journal, the rate must be constantly recalculated. It is important to establish statistics that will allow us to determine an acceptable R/R ratio.

However, it may happen that when setting the installation, the ratio will be unfavorable. There may be a strong temptation to raise the stop loss or change the take profit to open a position. This is a mistake, because this modification distorts the trading plan and, therefore, the basis of the win rate. The choice of position should be the result of your analysis, not the result of R/R. The only option in this case is to wait until a profitable setting is found.

**Conclusion**

Trading is not an exact science and requires many qualities. This practice is not available to everyone, regardless of the depth of the portfolio.

The skill of money management or risk management is necessary for everyone who wants to trade seriously. The risk-reward ratio is an important component of such management, as is the measurement of its win rate.

Nevertheless, it remains a fully relevant tool for evaluating a position, and this concept must be mastered for serious trading practice. Long-term success depends on it.