1. What is Risk/Reward

Risk/Reward (RR) is the ratio between what you can lose and what you can gain on a trade. Risk 1 to aim for 2, and the RR is 1:2.

  • Risk = distance from entry to stop.
  • Reward = distance from entry to the take-profit target.

2. Why it matters

  • RR tells you whether a trade is "worth it" before entering. Risking 1 to make 0.3 wins little and hurts when it loses.
  • RR combined with win rate decides long-term profit. You can win few trades and still profit, if each win is far bigger than each loss (see Expectancy).

3. How to calculate

RR = (distance to Take Profit) ÷ (distance to Stop Loss)

Example: enter 100, stop 96 (risk 4), target 112 (reward 12) → RR = 12/4 = 3, i.e. 1:3.

4. How to apply

  • Set a minimum RR per trade (many use at least 1:1.5 or 1:2); skip trades that don't meet it.
  • Don't stretch the target unrealistically just to make RR look good — the target must come from the market (support/resistance, structure).
  • RR pairs with win rate — break-even reference:
  • RR 1:1 → need win > 50%
  • RR 1:2 → need win > 33%
  • RR 1:3 → need win > 25%

5. Worked example

A strategy that wins only 40% sounds bad. But at an average RR of 1:2:

  • 10 trades: 4 wins × 2 = +8; 6 losses × 1 = −6 → net +2.

Conversely, winning 70% at RR 1:0.3:

  • 10 trades: 7 × 0.3 = +2.1; 3 × 1 = −3 → net −0.9.

This is why "high win rate" doesn't equal "profitable".

6. Common mistakes

  • Only looking at win rate, ignoring RR — many small wins, few big losses, net negative.
  • Stretching targets unrealistically for pretty RR on paper.
  • Moving the stop away worsening RR mid-trade.
  • Cutting winners early, holding losers — turning a good-RR strategy into a bad-RR execution.

7. FAQ

  • What RR is good? No absolute number. It must be high enough versus your win rate to be positive-expectancy.
  • Is a low win rate a problem? No, if RR compensates. Many trend traders have low win rates yet profit from large RR.
  • Skip a great-RR but low-probability trade? This is where RR must combine with a probability read — RR alone isn't enough.

8. Tools

  • _(Coming)_ RR calculator: enter entry, stop, target → get ratio + break-even win rate.

9. Checklist

  • ☐ Did I compute RR before entering?
  • ☐ Does RR meet my minimum?
  • ☐ Is the target market-based, not stretched for looks?
  • ☐ With my win rate, does this RR give positive expectancy?