# The ratio of risk and profit in the trade of cryptocurrency: why is it important

Risk and profit ratio (RISK/REWARD RATIO or RR) – a coefficient showing the ratio of risk to potential profit. The specific value of RR is calculated before buying an asset and allows you to evaluate the potential of the transaction from the point of view of the trading strategy of the trader.

If the ratio of risk to profit is greater than 1, then the risk is greater than the potential profit. When the value is below the unit, then the potential profit is greater than the inherent risks.

From the point of view of trading and investment, risk means a potential loss that the trader is ready to go, opening a position. The level of risk is usually controlled by setting Stop Loss orders, that is, applications for the automatic sale of the asset when reaching a certain price. This is an important trading tool, and it is necessary not only to limit losses. The level of risk is an integral part in the process of calculating the potential profit of the trader and his trade strategy in general.

Profit is the difference between the cost of buying an asset and the price at which it will be sold. In the context of RR ratio, profit is a potential level that determines the trader before entering the position to evaluate How does the Fed’s the potential of trading operation.

## How to correctly calculate the ratio of risk and profit

The generally accepted version of calculating the RR coefficient is defined as the ratio of risk to profit, that is, RR equal risk divided by profit. Although some traders, due to personal preferences, can use the reverse option where the profit is divided into risk, we will consider the standard example of the calculation, according to the formula below:

Suppose you want to buy an asset at a price of $ 100. You also decided to limit the risk, that is, put a stop-loss at $ 90, and set for yourself the target price at which you sell the asset to $ 130. In this case, the RR ratio will be 1 to 3 or a coefficient with an approximate value of 0.33. That is, the risk is less than potential profit.

In the example with the same entry price ($ 100), and the same target price ($ 130), but with a stop-loss at $ 40, the ratio of RR will be 2. This value of the coefficient indicates that the risk significantly exceeds the expected profit.

## The optimal ratio of risk and profit

One of the most popular values in the calculations of the ratio of risk and profit is 1 to 3 or a coefficient of 0.33. Relations 1 to 7, 1 to 10, 1 to 15 are also often used.

However, the choice of generally accepted RR options is a rough error in trading. The trader must determine what RR ratio is best suited for his trading strategy based on experimental data, statistics, market conditions.

For example, if a trader makes only 50% of successful transactions, then a RR equal to 0.5 or 1 to 2 will not bring any benefit. The target price of the sale of the asset before entering the transaction should statistically bring profit to the trader, and not just specifically in this trading operation.

In an example with a ratio of 1 to 3 or a coefficient of 0.33, the meaning of RR is laid down that one profitable deal can cover 3 unprofitable transactions. In the case when ratio is 1 to 5, one profitable transaction will have to cover 5 unprofitable.

Before evaluating the risks and making RR calculations, the trader evaluates the potential of price movement, finds an point for entering and draws up a prognosis of price movement for an asset, also determining the moment of leaving the position.

Only after that does it make sense to make RR calculations. If the resulting coefficient corresponds to the trading strategy of the trader, then he enters the position.

## Why calculate the ratio of risk and profit

RR is calculated so that the trader can effectively use his trading strategy, regulating the desired level of risk and profit to receive income on a long period of time.

Even if the percentage of successful transactions is small, say 20%, then a competent ratio of risk and profit can bring a long distance income to the fiction.

## Answers to popular questions

### What is the ratio of profit to risk?

RISK/REWARD RATIO or RR is a way to evaluate the transaction potential for a trader on the basis of his trade strategy and capabilities. Simply put, RR shows whether the transaction is profitable or not on the basis of potential risk and profit.

### What is WinReite in trading?

Vinrates in trading – the ratio of the number of profitable transactions to unprofitable. For example, if you close 60% of profit transactions, and 40% with a loss, then your WinReite will be 0.6 to 0.4, or 1.5.

### What is 1 to 3 in trading?

1 to 3 in trading – one of the most popular ratios of arrival at risk among traders. It means that at least 1 out of 4 transactions should be profitable. However, such a ratio must correspond to the selected trading strategy and correlate with WinReite. In some cases, the optimal ratio of profitable transactions to unprofitable may vary.

### What is RR in trading?

RR in trading is an abbreviation from the English term RISK/REWARD (risk/profitability) and means the ratio of profit to risk.