How To Calculate Risk Reward Ratio In TradingView – A Complete Guide

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The risk/reward ratio is a key metric measuring the relative size of potential gains versus losses for a trade. But how can you actually calculate risk/reward ratios in TradingView?

In this step-by-step guide, we’ll cover definitions of risk/reward, reasons for analyzing it, manual calculation methods, automating risk/reward in TradingView Pine Script, best practices for utilizing the metric, and more.

Follow along to unlock the power of risk/reward analysis on TradingView to make smarter trading decisions! Let’s get started.

What is Risk/Reward Ratio in Trading?

The risk/reward ratio compares the size of a trade’s:

Potential gain if price reaches the take profit target (reward)
Potential loss if price hits the defined stop loss level (risk)

For example, a trade with a 2:1 risk/reward aims to profit $200 on a $100 risk stop loss. The higher the ratio, the better reward relative to risk tolerated.

Why Analyze Risk/Reward in Your Trading

Measuring risk/reward ratios helps traders:

Gauge if a trade’s payoff is worth the risk
Stick to minimum ratio rules required for profitable strategies
Compare potential trade opportunities by risk/reward profiles
Enforce disciplined position sizing relative to stops
Identify trades with skewed or outsized profit potential

Analyzing risk/reward creates an objective trading filter.

Manually Calculating Risk/Reward Ratios in TradingView

Let’s walk through manually measuring risk/reward for a basic long trade:

Identify entry price, stop loss price, and take profit price either historically or for a hypothetical planned trade.
Subtract the stop loss price from entry price to get the risk or potential loss amount if stopped out.
Subtract entry price from the take profit price to get the potential reward amount if target is reached.
Divide reward amount by risk amount to get the risk/reward ratio!

This distills risk/reward into a numeric parameter for quick comparison.

Automating Risk/Reward Analysis in Pine Script

We can also auto-calculate risk/reward in Pine Script:

// Define entry, stop loss, and take profit logic
longCondition = close > ema
longEntry = close
longStop = close[1] - atr 
longTarget = close[1] + (2 * atr)

// Calculate risk vs reward 
risk = longStop - longEntry
reward = longTarget - longEntry
rr = reward/risk

Now the risk/reward amount and ratio are computed automatically!

Best Practices for Using Risk/Reward Analysis

Some tips for effectively applying risk/reward:

Establish a minimum acceptable ratio for trades like 1:2 or more
Be consistent applying risk/reward across asset classes
Balance between risk/reward optimization and win rate
Trail stops to improve ratios as trades move favorably
Avoid trades with undefined or unlimited risk scenarios

Setting prudent risk/reward minimums creates a trading edge.

Factoring Winn Rate Into Your Risk Management

Along with risk/reward, win rate impacts expectancy:

High risk/reward can offset lower win rates
Lower risk/reward needs higher win rates to profit
Optimize system rules to balance risk/reward and win rate

The combination of risk/reward and win rate determines long run profitability.

Access our advanced Onix Range Detector Indicator

Accounting for Volatility in Risk/Reward Ratios

Volatility also influences practical risk/reward levels:

Higher volatility assets can sustain higher risk/reward ratios
Lower volatility trades require judiciously tighter risk/reward for practicality
Scale stop distance and profit targets relative to volatility

Let volatility metrics like ATR guide position sizing and risk parameters.

Common Questions About Risk/Reward Ratios

Some frequently asked questions:

How to calculate for shorts or options? The same process applies – risk based on stop loss, reward based on target.

Why not just maximize reward and minimize risk? You need balance – extremely skewed ratios with low win rates won’t sustain profits.

What if a trade has undefined or unlimited risk? Avoid trades without clearly defined risk – you can’t measure or manage what you can’t quantify.

What ratio should I use? Depends on win rate and volatility. Typical ranges are 1:1.5 to 1:3 for most strategies.

Key Takeaways from Risk/Reward Analysis

Here are key points we covered about risk/reward ratios:

Risk/reward compares potential trading gains to potential losses
Analyze to take trades with payoffs aligned to your strategy
Can calculate manually or code as an indicator in Pine Script
Factor win rate and volatility when setting ratio rules
Use risk/reward to enforce discipline in your trading

I hope this guide gives you a methodology to integrate risk/reward analysis into your TradingView trading process! Please let me know if you have any other questions.