Risk reward ratio 1:3 setup examples

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A Risk-Reward Ratio (RRR) of 1:3 is a popular trading concept where the potential reward is three times greater than the risk taken on a particular trade. Essentially, you are risking a certain amount of capital to potentially gain three times that amount.

Here’s how a 1:3 Risk-Reward Ratio setup works, along with examples across different trading scenarios:

What is Risk-Reward Ratio?

Risk: The amount you’re willing to lose on a trade.

Reward: The amount you’re aiming to gain from the trade.

Risk-Reward Ratio of 1:3: For every $1 risked, you aim to make $3.

For example, if you’re risking $100 on a trade, the reward should be $300 (3 times the risk).

Examples of 1:3 Risk-Reward Ratio Setup

Stock Trading

Let’s say you’re trading a stock that is currently priced at $50.

Entry Point: $50

Stop Loss: $49 (risking $1 per share)

Target: $53 (a $3 reward)

In this case, for every $1 you risk, you have the potential to gain $3.

Forex Trading

For a forex trade, let’s assume you’re trading the EUR/USD currency pair.

Entry Point: 1.1000

Stop Loss: 1.0990 (risk of 10 pips)

Target: 1.1030 (reward of 30 pips)

Here, you risk 10 pips to potentially gain 30 pips, maintaining a 1:3 Risk-Reward Ratio.

Cryptocurrency Trading

In a cryptocurrency market like Bitcoin, let’s assume you’re entering a trade when Bitcoin is priced at $25,000.

Entry Point: $25,000

Stop Loss: $24,750 (risk of $250)

Target: $26,250 (reward of $750)

In this scenario, you’re risking $250 to potentially gain $750, creating a 1:3 Risk-Reward Ratio.

Options Trading

Suppose you’re trading call options for a stock, and the stock is priced at $100 per share.

Entry Point: You buy a call option at $5 premium.

Stop Loss: If the option loses value and falls to $2 premium (risk of $3).

Target: If the stock moves in your favor and the option increases to a $14 premium (reward of $9).

With a risk of $3, you aim for a reward of $9, keeping the 1:3 Risk-Reward Ratio.

Commodity Trading (Gold)

Let’s assume you’re trading gold.

Entry Point: $1,800 per ounce

Stop Loss: $1,795 per ounce (risking $5)

Target: $1,815 per ounce (reward of $15)

In this case, you’re risking $5 per ounce to potentially gain $15 per ounce.

Key Points to Remember for 1:3 Risk-Reward Setup

Discipline is Crucial: Always stick to your stop loss and target. If you follow a 1:3 risk-reward ratio, a small percentage of successful trades can still yield profits.

Consistency Over Time: Even if you only win 33% of the time, a 1:3 risk-reward ratio can still make you profitable in the long term.

Risk Management: The stop-loss should be set logically (based on technical analysis or market conditions) to ensure the risk is controlled.

Conclusion

A 1:3 Risk-Reward Ratio setup helps traders minimize risk while maximizing potential returns. By carefully managing your trades and following a disciplined approach, you can build a strategy that leads to consistent profitability.