MetenaRisk/reward ratio: definition and calculation
The ratio between what a position can lose you, down to the stop, and what it can gain you, up to the target.
Definition
The ratio is calculated before entering: the distance between the entry price and the stop, compared with the distance between the entry price and the target. A ratio of 1 to 3 means you risk 1 to aim for 3.
It is read alongside the win rate. With a ratio of 1 to 3, a strategy breaks even by being right one time in four. With a ratio of 1 to 1, you need to be right more than one time in two, fees included.
The trap is setting the target to obtain a flattering ratio. The stop and the target come from the analysis, and the ratio is observed afterwards. If it is poor, the position is not worth taking.
Worked example
Entry on bitcoin at $60,000, stop at $54,000, target at $78,000. Risk: $6,000. Gain aimed for: $18,000. Ratio: 1 to 3.
In Metena
In Metena, the stop and the take-profit are noted on each position, and the app shows the distance from the price to each. The Technical pillar of the diagnostic examines the balance between your entry and exit rules.
Notify me at launchRelated terms
- Stop-loss
- A price level set in advance, below which you sell to limit the loss on a position.
- Take-profit
- A price level set in advance, at which you sell all or part of a winning position.
- Money management
- Managing the size of your positions and your exposure: how much to risk per holding, what reserve to keep, which limits never to cross.
- Sharpe ratio
- Return relative to the volatility endured. The higher it is, the more the return was earned with moderate turbulence.
Put these ideas into practice.
Write your strategy in a few minutes: Metena analyses it when you ask and explains each term in context.
Notify me at launchEducational content. It is not investment advice. Crypto-assets carry a high risk that can go as far as the total loss of capital.