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  • Jay

Risk Reward Ratio

Wonder how to calculate a risk reward ratio?

Here's a good example with $NOW (ServiceNow) to go through step by step, first on the weekly chart, then we'll zoom into the daily chart.

The weekly chart shows a nice uptrend since February 2016. While the last few weeks were consolidating near the 161.8 Fibonacci extension, last week had a nice hammer testing the trend lines followed by this week's bullish candle. The RSI is also in a bullish range, although slightly overbought but could see go higher as seen last month.

$NOW Weekly Chart

Moving on to the daily chart, the last 2 candles look a bit extended although the price is still near the 50 Moving Average, both the 50 & 200MA are sloping upwards and the RSI still has plenty of room to climb.

In Conclusion...

The price is currently at resistance and would need to break through the $130.05 highs to continue its bull trend.

IF this would happen, the target would be the next Fibonacci level (261.8) at $164.50, whereas the risk to the downside would be the "current" Fibonacci level (161.8) at 119.20.

Therefore your risk is $10.85 with your upside being $34.45, which means your risk reward ratio is 1:3.175, i.e. you are risking 1 to make 3.175 ...sounds like a pretty good deal to me!

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