Risk reward is a straightforward concept that will have a large effect on your trading strategy.
Whilst it may be simple and easy to understand, the way in which you use risk reward in your trading and the strategy you choose to deploy it with is extremely important.
If you are a trader that aims for large reward trades, then your trading style and strategy is going to be completely different to someone else who is aiming for a higher percentage of wins, but lower rewards. This trader would be looking for lower risk trades.
Understanding your risk reward profile is obviously important to the trades that you make.
Being able to find what the potential risk reward ratio is on a trade on the fly in real-time can be very beneficial when deciding whether to make an entry or not.
In this post we look at the best free risk reward indicators for MT4 and MT5 that will quickly show you your potential risk reward right on your charts in real-time.
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What is Risk Reward?
At its most basic risk reward is how much you are willing to risk compared to what the potential reward may be.
For example; if you are risking $100, but your trade could have a profit of $300, you would have a 1: 3 risk reward or RR. That is because for every 1 you are risking, you could make a potential 3.
A 1:1 risk reward scenario would be where you are risking 1 with the potential profit outcome of 1. For example; you risk $100 on your trade. If it loses, then you lose $100. If however the trade wins you will make $100.
Risk Reward Examples
Below is a chart showing a potential 1:2 risk reward trade.
In this example; 10 pips is being risked for the stop loss and 20 pips is the potential profit target. The target is two times the risk.
If a trader making this trade was risking $100 and price went against them and hit their stop they would lose $100.
If price moved higher into their 20 pips target they would make 1:2 risk reward or $200.
NOTE: It is crucial you understand how to calculate your profit and loss correctly for your risk reward strategy to work. You can read a lesson on how to correctly calculate your trading profit and loss here.
Risk Reward Indicator MT4
NOTE: If you do not yet have the best MT4 / MT5 charts to use with these indicators, then you can get free demo charts here.
This is a super simple, but also very effective Metatrader risk reward indicator from MT4 Indicators.
This indicator will help you visualize and plan out your trades potential risk reward right on your charts with three lines.
The three lines are;
1: Bid Line
2: Stop Loss
3: Target / Take Profit
You can also drag the stop loss and take profit levels to plan where your risk reward for each trade should be.
As the chart shows above; you will also be able to see exactly what your risk reward potential is in number terms right on your chart.
- You can read about and download the MT4 risk reward indicator here.
Risk Reward Indicator MT5
This MT5 indicator by Invest Soft is designed to help you mark your potential trade entry, stop loss and target entry points easier.
It is also designed to help you work out and plan your risk reward for each trade directly on your chart so you don’t have to do it manually.
This tool will help you analyze the potential risk and also reward of each trade as well as the amount of potential profit or loss you could make which is handy.
NOTE: This indicator comes with a demo / free version and a premium version. Linked below is the demo version.
- You can read about and get the MT5 risk reward indicator here.
NOTE: Need to learn how to download and install MT4 / MT5 indicators? Read the quick tutorial here; How to Download, Install and Use MT4 and MT5 Indicators
Risk reward and the ratio you use in your trading is incredibly important, but also dependent on the system and strategy you are using.
Whilst you will hear some traders say ‘you should be using a minimum of xx risk reward’, what is important is the overall mathematics and if your trading strategy makes profits.
Whilst having an indicator such as these can be incredibly useful for analysis especially if you want quickly to see if a trade is a worthy setup, don’t rely on them alone. Make sure you correctly position size your trades and have properly assessed the risks.