The Risk to Reward Ratio Explained in One Minute: From Definition and "Formula" to Examples

You've probably come across the risk to reward ratio rather frequently if you at least occasionally consume financial media. Some people believe the risk to reward ratio is just some random quantifiable term people throw around, whereas others think you have to apply ridiculously complex formulas to calculate it.
The truth is... you've guessed it, somewhere in the middle.
As explained in this video, the risk to reward ratio is indeed something that can be let's say "calculated" but memorizing an overly-complicated formula is not required.
From definition to "formula" and ultimately examples, this video explains everything you need to know about the risk/reward ratio and how it can be used in... real life.
There's absolutely nothing complicated about it, it's simply a useful little tool for your economic arsenal. In just one minute, you should be able to master the risk to reward ratio and figure out yourself how (or whether or not) it can be used for your own needs. Whether you think about it when trading/investing or when making an important business decision, there's most likely ample room in your life for the risk to reward ratio :)

[@OneMinuteEconomics]

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[@paulomendoza94]

Saves time and teaches clearly!

[@OneMinuteEconomics]

Happy to hear that Paulo, music to my ears :)

[@bryanaf9875]

Shouldn’t the risk/reward be 1:4 instead 1:3

[@OneMinuteEconomics]

Nope, since the risk to reward ratio let us know how much you stand to PROFIT for every unit of currency you risk. In our words, you pay $100 for a Company A share and sell at $400, leaving you with a profit of $300 (again, "profit" is the operative word, since we subtract the $100 you've paid for the share from the $400 you sell at)... 1:3 in other words :)

[@leslieahernandez]

@@OneMinuteEconomics but then wouldn't the ratio in your example be 1:4? If you have to pay $1000 and could gain $5000 (therefore profit $4000)?

[@timalp3680]

@@leslieahernandez yes, you are correct

[@jedakiahroper]

@@leslieahernandez No. I pay $100 for a stock, I'm now down $100. The stock goes to $400. The stock at that value has increased my original purchase of $100 to $400. I'm not up $400, I'm up $300.
1/3
That's an investment.
A bet I wager $1000, I'm now at risk to lose all of it if I lose. If someone else wagers $5000 against me and i win i get $5000 and keep my $1000. I end up with $6000 in my hand. I keep my wager and take the other person's money.
1/5
Gambling and Trading are different, I wouldn't use them as examples together.

[@Woodward06]

@@jedakiahroper Correct. The last line has me cracking up

[@unwisemonkey2945]

isn't the last one 1:4 RR instead of 1:5 as he is risking $1000 to turn into $5000 (im using your earlier $100 stock being sold at $400 as reference) help im confused

[@OneMinuteEconomics]

The risk to reward ratio essentially describes how much you will PROFIT relative to how much you are RISKING. In that specific example, since it is stipulated that Bill risks $1,000 for a potential PROFIT of $5,000, the risk to reward ratio is 1:5. If instead of receiving a $5,000 profit he would receive $5,000 back but $1,000 of that would be his own money (he puts $1,000 on the floor and his friend puts $4,000 down, with the winner receiving the pot), then his profit would only be $4,000. Thus, in that particular instance, we would be looking at a 1:4 ratio :)

[@unwisemonkey2945]

@@OneMinuteEconomics thank you for clearing that up

[@elizabethasiedu9129]

My risk to reward is 1:6 ..I risk 20 pips for 120 pips on GOLD and my strategy is a 80% win rate

[@Lukassfx2005]

Whata ut called mate? Pretty impressive🔥

[@Stan49]

Nice

[@ugwuchinagodavid9191]

Can you teach me how to trade please

[@laughinglaudaworld6793]

If we have 3: 1 risk reward ratio than probability of profit is 95 percentage if our capital is more than our risk reward ratio

[@stop8738]

Yes but my issue is you could set your goal to any number, your goal won’t dictate the market. I could make $1,000 trade with my hopes aka goal that it gets to $4,000 therefore 1:3 R/R ratio but what is to stop me saying I will sell at $2,000 or $3,000?

[@mjt1517]

Then you’ve changed the goal and also the ratio.

[@MeysamHoseini-pj9en]

Hello,
I entered 1000 USDT in a Crypto pair trade position by a Risk-to-Reward of 2 ;
If it reaches to my take profit/TP, then I will
have 2000 USDT ?
Thanks,

[@serdartepeyurt7422]

Are you looking for a $2000 profit or $2000 in total in the end? If you're looking for a $2000 profit, then you should have $3000 after you sell it.

[@mohammed31701]

Thank you for this explanation

[@OneMinuteEconomics]

You're more than welcome Mohammed :)

[@smashSpikeMC]

da dude bro so skillzies crypto brah house fliping brah

[@OneMinuteEconomics]

You basically summed up cryptotwitter :P

[@tomaskoristka1025]

Did Bill won the bet?

[@OneMinuteEconomics]

We don't know. What we can be quite sure about is that if Bill keeps it up in terms of only being willing to accept bets that are asymmetrically in his favor probabilistically speaking, the likelihood of ending up in net loss territory is quite low :)

[@newoldcars2764]

Tom is mad crazy

[@bobbyalexander1860]

So playing the lottery is a great idea according to this video

[@OneMinuteEconomics]

Can't go wrong :P

[@90deltaderivatives35]

Are you high? The R:R is trash in the lottery so you clearly didn’t do your homework.

[@ArnoldNatasha-f6f]

So... gambling, lol.