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  • Writer's pictureMatt DeLong

What is the trading indicator that tells about the risk to reward ratio in any given trade?

No, there is no indicator like this…

It’s up to you to determine how much “risk” you want to take on any trade and then determine a probability with which you are comfortable taking the risk, as in, the odds are stacked in your favor.

Anyways, in Las Vegas, you are gambling, because the house always wins!

For example, I know my strategy has a 65% win rate and when I win, I win $2.50 for every $1.00 of risk. When I see my exact “setup” forming on a stock chart, my 65% probability is in my head when I place the order to buy/sell. I don’t know “for sure” what will happen, will the 65% win scenario occur or the 35% loss scenario occur, only time will tell.

In trading, I am playing probabilities. My job isn't to buy/sell stocks, it's evaluating risk/reward scenarios and pull the trigger when odds are stacked in my favor.

NOTE: The Sharpe ratio isn’t an “indicator” as mentioned in other answers, it’s a ratio — you can’t really add it to a stock chart — which is what indicators are for.

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