Profit/Risk Ratio - what is it and how to use it?

[Stayne]

Professional traders use the profit/risk ratio to estimate a possible profit in relation to a possible loss. In order to understand how much is the profit/risk ratio, the trader needs to determine both potential profit and potential loss. The potential risk is the difference between the entry point in the position and the stop order. The potential profit is the difference between the entry price and the target order.

If you buy Bitcoin at $6900, place a stop order at $6800 and take profit at $7200, the risk will be $100 ($6900 - $ 6800), and the profit will be $300 ($7200 - $6900).

Comparing the risk with the possible profit, we get the ratio: risk/profit = $300/$100 = 3

If the ratio is bigger than 1.0, it means that the profit is bigger than the potential loss.

Why is it useful?

Let's use the statistics.
The table below shows the dependence of the probability to lose the whole deposit on the accuracy of your trades and the profit/risk ratio in each trade. So, we can see that even if your strategy has only 60% accuracy, but at the same time, the profit/risk ratio is at least 1.5:1, you can already be sure that you will not lose all your money. But if the ratio is 1:1, with the same 60% accuracy, the probability of losing the deposit with a series of unprofitable trades is already 12%