RR rate (Risk Reward) is an important element in the trading system. However, people new to trading often do not pay enough attention to this ratio. So what is the RR rate and why is it so important? How to calculate this ratio? All these questions will be answered in today’s article by Crypto Trading. Let’s start exploring!
Concept
Let’s learn about the concept, calculation, advantages, and disadvantages of RR right now!
Definition of Risk/Reward in Making Crypto Money
The risk/reward ratio measures the relationship between the level of risk and the expected return for each trade. This is the process of looking at the difference between entry, stop loss, and take profit based on RR. In all trading strategies, the optimal goal is to achieve maximum profit with minimum risk.
Calculation
The risk/reward ratio is a ratio calculated by dividing the risk level by the expected return.
The formula for calculating RR is simple as follows:
RR rate = (Entry Point – Stop Loss Point) / (Profit Target – Entry Point)
If the ratio is greater than 1, you are taking on less risk than your potential return. Three possible situations can arise from this calculation:
- Risk > Reward
- Risk < Reward
- Risk = Reward
In these three cases, we always want to keep the risk lower than the reward. The goal is so that when the trade reaches the stop loss level, the loss will be minimal. The ultimate goal is to maintain the lowest possible risk in each trade to ensure potential profits.
See more: Line EMA: the secret to every successful transaction
Advantages and disadvantages of RR rate
The risk/reward ratio helps traders evaluate the risks and potential profits of a trade. It allows effective risk management through placing stop loss and take profit orders. At the same time, it helps limit losses while maximizing profits.
However, this ratio does not guarantee success because:
- Based on assumptions about future price movements, which may not be accurate.
- This may be oversimplified, not considering market conditions, liquidity, and transaction costs.
For example, in the event of strong market volatility, the trader may have to adjust the stop loss or take the profit level. In particular, the cryptocurrency market is famous for its high volatility.
After calculating the R/R ratio, traders should evaluate whether it fits their strategy and risk tolerance. The R/R ratio cannot be the only factor to rely on when trading cryptocurrencies. You should combine it with other trading strategies and plans to be successful.
The important role of RR rate in making Crypto Money
RR rate plays a certain role in making money in crypto in particular and in the financial market in general. Benefits include:
- Determine Risk Level :
The R/R ratio helps investors evaluate the acceptable level of risk for each trade. Parallelism helps limit losses when the market does not behave as predicted. Good management of this index helps maximize potential profits and maintain investment discipline.
- Optimize Profits :
A higher R/R ratio indicates greater profit potential relative to the risk. Investors often look for trades with a high R/R ratio to optimize their chances of profit, as opposed to their win rate. The reason is that if the risk is too great, investors can still lose money.
- Setting Stop-Loss and Targets :
Before trading to earn crypto, it is necessary to clearly define the stop-loss level and profit target. This is based on technical and fundamental analysis of the stock, then setting the opening or closing point of the trade.
- Prioritize High R/R Ratio :
Choose trades in earning crypto that have an R/R ratio of at least 2:1 to optimize profit versus risk. An R/R ratio that is too low can lead to repeated losses and negative accounts.
Method of increasing RR rate in Crypto trading
To effectively apply the Risk/Reward (R/R) ratio, investors need to pay attention to the following important methods:
Know how to comply with what a Stoploss point is
Complying with Stop Loss or Take Profit is a big challenge for traders. This depends on many factors such as method, psychology, time frame, equity, and trading volume. Many people experience a situation where the price turns around, leading to discouragement and cutting orders. Then the price reversed again according to the analyzed trend. When the order becomes profitable, the price turns around, causing profits to decrease, and causing the trader to prematurely cut the order. Sometimes, even though we have a good strategy and choose orders according to the RR rate, we end up closing the order early because of impatience.
Use support tools to calculate and monitor the R/R ratio
There are many tools and software that support the accurate and convenient calculation of the R/R ratio. They provide charts, detailed reports, and technical analysis. From there, helping investors make decisions based on data and analysis. Tools to help minimize emotional risk, automate monitoring and adjustment of trading strategies, optimize profits, and manage risk more effectively.
Along with using monitoring tools for RR rate, you need to know What is ROI. ROI (Return on Investment) is an index that measures investment performance. ROI formula is:
(Profit – Cost)/Cost
In which profits and costs are often determined over a certain period. Investors often use the RR rate to evaluate risk and reward. And then you need to use ROI to measure the performance or ultimate profit of the transaction after completion.
Enter an order when the RR rate is greater than 1:1
You can prioritize choosing trading signals with RR of 1:1.5 or higher, and ignore opportunities with RR rate lower than 1:1.
Many people often refuse signals with a 1:1 RR. However, in reality, they have overlooked many potential opportunities. There are many price models where the take-profit ratio is only equal to the stop loss level, meaning the RR is only 1:1.
Don’t let emotions influence your decision to make money trading crypto
Always stay disciplined in trading and avoid letting emotions influence your decisions. Discipline is the most important factor in using the R/R ratio effectively. Investors need to follow the proposed trading plan and not let greed or fear influence their decisions. This ensures that awareness and efficiency are demonstrated when the R/R ratio is applied.
Factors affecting the Risk/Reward ratio in technical analysis
Many factors often have an impact on the RR rate in technical analysis. This includes:
The market situation affects crypto earning
In volatile markets, traders may feel the need to accept a lower R/R ratio than in stable markets. In unstable market conditions, ensuring and considering the appropriate R/R ratio becomes an important part of a trading strategy. Traders need to carefully consider market volatility and liquidity to determine the appropriate level of risk for each trade.
Liquidity in crypto trading
Liquidity is an important concept in the cryptocurrency market. It refers to the availability of tokens or pool tokens for exchange. Liquidity reflects the ability to buy and sell assets quickly and easily. When liquidity is low, trading risks can increase, and achieving profits can become more difficult.
See more: Opening an Bybit exchange account for traders
The influence of technical analysis of stocks
The type of stock plays an important role in determining the R/R strategy. From blue chips to growth stocks, each requires a different consideration due to varying levels of volatility and risk. For example, blue-chip stocks are typically less volatile than penny stocks. This leads to a difference in the R/R ratio. Penny stocks, with their low valuations, often have the potential to increase in price faster than large-cap blue-chips.
Knowledge in technical analysis and investment experience
Experienced investors often can make accurate assessments. Includes the risk level and profit potential of each trade. Understanding market factors, trading techniques, and the ability to read charts, etc. are all important factors that help them identify and apply risk effectively. At the same time, accumulating experience from previous transactions also helps them increasingly improve their risk assessment and management skills. From there, optimize profits in a volatile trading environment.
Conclude
RR rate is an important tool in risk management and profit optimization. Understanding and applying risk effectively helps control risk, increase profit opportunities, and make wise investment decisions. Investment success comes from intelligent and considered management of risk and return. Crypto Trading provides this knowledge through our other articles. Let’s follow along to become a smart investor!
FAQs
What is the RR rate?
RR rate is an index that measures the relationship between risk and reward in investment trading.
Why are RR rate levels different for different asset classes?
The level of scaling may vary for different asset classes. This is due to the unique volatility and risk nature of each asset class.
Why is the RR rate important in investing?
Because it helps investors evaluate the relationship between risk and reward. From there decide whether a transaction is worth participating in or not. In addition, this is an effective way to manage risks.
