The stock market is easily one of the riskiest places to generate investment returns. But a greater level of risk is compensated with much higher possible returns; whether you are new to trading or are already an expert trader/investor, you must be aware that every trade comes with a specific level of risk.

Before using a NinjaTrader risk reward tool to calculate risk and reward, you must know that before you look to trade, you must be comfortable with the amount you are willing to risk. The risk-to-reward ratio is mainly used for making this comparison. In this blog, you will learn more about the risk-to-reward ratio and how to calculate it.

What is a Risk-to-Reward Ratio?

The risk-to-reward ratio is mainly used to evaluate the reward (possible profit) against a trade's possible reward (loss). Stock traders and investors mainly use this R/R ratio to fix the price at which they are going to leave the trade. Stop-loss order is used here to exit the position if, in any case, it starts to become the opposite of what a trader forecasted.

The relationship that is between risk and reward can help determine if the possible returns will outweigh the risk or if it's the opposite. In simple words, the R/R ratio can help a trader (whether new or experienced) decide if a specific trade is worth taking the risk of.

How Do You Calculate Risk/Reward?

There are multiple traders today who use a NinjaTrader risk reward tool but before you do so, know how to calculate risk/reward. The one thing you must remember in this case is that to calculate the risk and reward; you must divide your net profit by the price of the maximum risk. For instance, if your stock goes up to $29/ share, you will make around $4 for every one of your 20 shares for a total amount of $80.

If you paid $500 for it, you must divide 80 by 500, giving you 0.16. This indicates that the risk/reward for this idea is 0.16:1. Experienced investors will not give this idea a second look at such a kind of risk/reward ratio. So, you can think about whether it's a bad idea or not.

Using Risk/Reward Calculations

To include risk/reward calculations in your research, you can follow the steps provided below:

  • You must pick a stock using extensive research.
  • You can set the upside and downside targets depending on the current price.
  • After this, calculate the risk/reward.
  • If you find that it is below your threshold, you can raise your downside targets to achieve an acceptable ratio.
  • If you are unable to reach an acceptable ratio, you can begin all over again with a new investment idea.

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Use the Ninjatrader Risk Reward tool.

Whether you are a fairly new or an experienced trader, you must know more about the risk-to-reward ratio and how to calculate it. To make things easier, you can choose to use the NinjaTrader risk reward tool to calculate the risk and reward in trading easily. If you require trading software to trade, you can use ninZa.Co's trading software has redefined benchmarks for the industry.