[snip]
STEP 1: Understanding Risk to Reward Ratio
Risk to Reward Ratio is the most solid strategy provided by Risk Management Theory. It is called Risk to Reward but actually is Reward to Risk Ratio It basically is a ration which is developed by this formula
Profit you can earn per trade(Difference from Target to Entry)
_________________________________________________
Risk you take per trade (Difference from Stop Loss to Entry)
This means for example if you take a trade at $10000 and your pattern says a target of $10200 and stop loss at $9900. Now feeding in the values in formula:
$10200-$10000 $200 2
____________ = __________ = _ = 2:1
$10000-$9900 $100 1
Well, this is a good explaination OP and I like this number 1 risk management.
Risking money is hard to speculate but at least you know that anytime what will happen you are risking that you can afford.
Actually, In essence, in order to calculate the risk-reward ratio you only need three components:
1] Entry Price
2] Stop Loss
3] Take Profit
Try to refer to my source for further knowledge and I think the 3 basics are quite a lack of information.
Source:
https://tradingstrategyguides.com/trading-risk-management-strategy/