Not all trading systems require traders to calculate risk/reward (or more accurately reward/risk) ratios. But if your system does, then this tutorial will be very useful.
There is already a risk reward tool inside the default installation of MT4. The key is to change the settings on the Fibonacci tool and use Fibonacci extensions to visually mark multiples of risk on a chart.
You probably already know why targeting higher risk multiples can be useful, but if you don't, skip down to the end to get a quick tutorial.
No spreadsheets or manual calculators required.
How to Use the “Risk Reward Tool” in Metatrader
If you are wondering why you have never seen a risk reward calculator in Metatrader, there is a good reason…because there really isn't one.
However, you can hack the Fibonacci tool make it a super simple to way to graphically calculate your stop loss and target prices.
No complicated online calculators or confusing formulas.
If you prefer the text version, it is available after the video.
In order to setup the Fibonacci tool to work as a reward/risk calculator, you will have to make a few adjustments. First, click on the Fibonacci button to select the tool.
Then “pull” a Fibonacci anywhere on the chart. This is done by clicking and dragging while the tool is selected. When you release your mouse, the Fibonacci will be set.
The red line will have little red handles that look like squares. If you don't see them, double-click on the red line and the squares will appear. When you click and drag on one of them, you can adjust the Fibo accordingly.
Right-click on one of the squares and you will get the object menu. Select Fibo properties…
When the properties box comes up, make sure the Fibo Levels tab is selected. Then select each level and click on the Delete button to remove all existing levels.
Then click on the Add button to add new levels. These are the new settings that you will add, the first number is the Level and the second setting is the Description.
- -1, %$ (-1R)
- 1, %$ (Entry)
- 3, %$ (1R)
- 5, %$ (2R)
- 7, %$ (3R)
- 9, %$ (4R)
- 11, %$ (5R)
The “%$” part tells Metatrader to print the price and makes it super easy to tell exactly at what price you should set your stop loss and profit targets.
You can change the description after it to suit your preference, but I have found that these are the shortest abbreviations.
While the Fibonacci tool is selected, put your crosshair at the point where you will enter.
Then click and drag so that the -1R line is where you want your stop loss to be.
From there, your profit targets will be laid out and all prices will be printed.
Why Reward/Risk Ratios are Important
Targeting higher multiples of risk is a great way to improve the profitability of your trading system.
It can make up for lower winning percentages or make your existing system even more profitable.
But there is a fine line to walk between increasing yield and being greedy.
Target too high of a risk multiple and your winning percentage can drop too low and will lose your edge. So you really need to test your system and find a good balance.
If you want to read more, this article makes good points when it comes to not focusing too much on one metric like reward/risk ratio.
So that is a simple way to hack the Fibonacci tool and turn it into a very convenient reward/risk tool. Of course, this is assuming that you do not already use the Fibonacci tool for what it was meant for.
But even if you do use Fibonacci levels, you can still use the price level trick to get the exact price of your levels.
To get more Metatrader tutorials, click here.