0
0
Due to the volatile nature of cryptocurrencies, there’s a chance that you could lose your invested funds if you are not well-grounded with a risk management system.
This is one of the most essential aspects of crypto trading. Traders are advised to exercise extra precautions in order to invest safely. One of these precautions is making use of the metric called the risk/reward ratio.
What then is the Risk/Reward Ratio?
The risk/reward ratio is a metric that crypto traders use to measure the expected profit against the possible loss before trading. Simply put, the R/R ratio is determined by the difference between a trade entry point to a stop-loss and a sell or take-profit order.
The first step to using the R/R ratio is understanding your own risk tolerance. The risk/reward ratio marks the prospective reward an investor can earn for every dollar they risk on an investment.
Before investing, it’s important to assess certain factors. For example, your financial situation, how much risk you’re willing to take, and what investment sites will be favorable for you.
Because of the rise in fraudulent crypto sites, it is emphasized that you select a legit Bitcoin investment site that will protect you from hackers and fraudsters. Using a legit Bitcoin site not only keeps your mind at rest but also guarantees reimbursement of funds if a security breach occurs.
How to Calculate Risk and Reward Ratio
Calculating the risk/reward ratio is very simple, all you have to do is calculate the risk you are taking per trade vs. the reward you will gain.
The formula is:
Risk-Return Ratio = possible loss / potential gain
For instance:
Your entry trading fund: $4000 (price at which you bought BTC)
Your possible stop loss is: 3800 (the stop loss here is the point at which you will have to sell your BTC. In this case, you are willing to risk $200 worth of BTC.
Expected gain: $5000 (if the price of BTC goes up, the gain price is the point where you will sell your BTC. This means you will be making $1000 worth of BTC as your reward.
If you don’t want to do this calculation manually, you can decide to use an online risk/reward ratio calculator. A cryptocurrency calculator is another wonderful tool you can use to calculate your crypto gains. Investors use it in different ways such as planning future investments and trades and calculating returns in gains or losses from historical trades.
Why is the Risk/Reward Ratio Important in Crypto Trading?
- It helps crypto traders to properly manage risk by placing stop-loss orders and profit out there by limiting losses and maximizing profits.
- The risk/reward ratio guides traders away from making impulsive decisions by helping them assess the potential risks and rewards associated with each trade.
- The risk/return ratio helps investors determine if a potential investment is worth the stress of venturing.
Wrapping up
Although a risk and reward ratio is very needed in making trades, still you have to understand that it is not certain to generate profits. This is because it is based solely on assumptions about an asset’s future price without considering other important factors such as current market conditions, liquidity, and trade timing.
However in order to achieve potential with this metric you have to make use of other trading tools and techniques before proceeding to trade your funds. Also, please note that there’s always the possibility of loss, as no one knows the future.
