How To Calculate Risk Reward Ratio In TradingView – A Complete Guide
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)
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 - atr longTarget = close + (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.
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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.