Reward-to-Risk Ratio

Odd Enhancer 4: Reward-to-Risk Ratio

The reward-to-risk ratio gives us a good idea of whether we have a chance of making money trading a supply or demand zone or not. We need to choose trading opportunities that offer us at least a 3:1 reward-to-risk ratio.

A ratio of 3:1 reward-to-risk ratio is a perfect ratio because we are risking 1 to gain 3.

For example, if a trade has 10 pips stop loss, then the target should be at least 30 pips away from my entry point. If the market doesn’t give at least a 3:1 ratio, we stay away from the trade and look for another one offering a 3:1 reward-to-risk ratio.

A 2:1 ratio is also a good ratio, and trades could work out just fine, but again we are choosing high probability setups and leaving those with a low rate of success.

A 1:1 ratio or less is considered a non-valid entry signal since the market doesn’t offer a good opportunity to make money.

In this example, we have a good reward-to-risk ratio greater than 3:1. Here we have a good chance of making money trading this pair.

The next example shows a bad trade since the risk is greater than the reward and the price did not move far enough from the supply zone to give us good odds of success.

Notice how price left the supply zone and did not go all the way down to test the demand zone. Always choose a 3:1 reward-to-risk ratio to give yourself more room to make money.

Using this odd enhancer, we can give a maximum score of 3 points.

If the zone gives us at least a 3:1 ratio, we give our zone a score of 3 points.

If the zone gives us a 1.5:1 ratio, we give it a score of 1.5 points.

If the zone gives us a 1:1 ratio, the score is zero as we ignore the zone and we wait for another opportunity.

In the following example, we have a trading setup giving us more than a 3:1 reward-to-risk ratio.

Once the price retraces back up to the supply zone, we short because we get more room for price to move before being stopped.

For this trading setup, the score is 3 points as we have more than a 3:1 ratio.

In this example, we have a reward-to-risk ratio of 1.08:1, which is considered a weak zone to trade because we have not enough room for price to move. The score for this zone is zero.