Risk Reward Ratio Indicator

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Risk Reward Ratio Indicator

Introduction to Risk Reward Ratio Indicator
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Seasoned traders aim for a consistently profitable trading strategy over the long term. Statistics would tell us that traders have only two key factors to play with, Win Rate and Risk Reward Ratio.

This indicator helps traders ensure that every trade they take would yield a positive Risk Reward Ratio.

What is the Risk Reward Ratio Indicator?
The Risk Reward Ratio Indicator is a custom technical indicator which can help traders automatically compute for the Risk Reward Ratio of a planned trade setup. Traders can predetermine probable entry price levels, as well as project take profit and stop loss price levels. The indicator then indicates the probable Risk Reward Ratio based on the projected price levels.

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How the Risk Reward Ratio Indicator Works?
The Risk Reward Ratio Indicator automatically plots three lines representing the Open, Take Profit, and Stop Loss price levels. Traders can then drag these lines towards the desired price levels based on their trade setup. The indicator then measures the distance from the Take Profit price level towards the Open price level, and the distance from the Open price level towards the Stop Loss price level.

In a buy trade, the indicator would subtract the Take Profit price level from the Open price level, and the Open price level from the Stop Loss price level. This is then inversed on a sell trade.

The indicator then computes for the Risk Reward Ratio by dividing the distance between Take Profit and the Open price and the distance between the Open price and the Stop Loss price. It then displays the result as the Risk Reward Ratio on the lower left corner of the chart.

How to Use the Risk Reward Ratio Indicator for MT4?
The Risk Reward Ratio indicator is not like the usual technical indicator that would help traders identify trade entries and trade direction biases. Instead, it is a tool that would help traders objectively identify if the risk they are taking is worth the probable profit they are projecting.

As such, traders should use this indicator as an additional layer of risk management in order to avoid bad trades from a risk management standpoint.

Simply drag and drop the lines based on your trade setup and decide whether the trade is worth the risk based on the Risk Reward Ratio provided.

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Buy Trade Setup
When to Enter?

If you have a probable buy trade setup based on other bullish indications or patterns, drag the Price, Take Profit, and Stop Loss lines based on your trade setup. If the Risk Reward Ratio displayed below is better than 1:1.50, then open the buy trade as planned.

When to Exit?

Allow price to hit the predetermined Take Profit or Stop Loss levels.

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Sell Trade Setup
When to Enter?

If you have a probable sell trade setup based on other bearish indications or patterns, drag the Price, Take Profit, and Stop Loss lines based on your trade setup. If the Risk Reward Ratio displayed below is better than 1:1.50, then open the sell trade as planned.

When to Exit?

Allow price to hit the predetermined Take Profit or Stop Loss levels.

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Conclusion
Although this indicator does not provide trade entry signals, trend biases, or momentum reversal signals, it is probably one of the most important tools in a trader’s arsenal. Traders become consistently profitable based on a positive profit factor and the Risk Reward Ratio is one of its key ingredients.


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