Risk-to-Reward Ratio
Risk-to-reward compares how much you can lose to how much you can gain on a planned trade.
Quick answer
Risk-to-reward compares how much you can lose (entry to stop) with how much you can gain (entry to target) on a planned trade. Aiming for at least 1:2 means winners can outweigh losers over time.
What it means
Set three levels: entry, stop (where you're wrong), and target (where you'll take profit). The distance to the stop is your risk; the distance to the target is your reward. Divide them to get the ratio.
Why it matters
R:R and win rate work together. With 1:2 risk-to-reward you can be wrong more than half the time and still come out ahead. Planning R:R before entering turns 'this could moon' into a decision you can actually evaluate.
What happens if you ignore this
Trade without checking R:R and you can win most of your trades yet still lose money — because a few oversized losses erase many small wins. Poor risk-to-reward is a slow leak that discipline on entries alone can't fix.
Common mistakes
Chasing trades with tiny upside and large downside, or moving the stop further away mid-trade so the 'reward-to-risk' you planned quietly disappears.
Story
Theo wins 7 of his last 10 trades and feels unstoppable. But he lets losers run and snatches small profits on winners.
He expects a 70% win rate to mean he's profitable.
His average win is $20 and his average loss is $120. Three losses (-$360) swamp seven wins (+$140). He's down overall despite winning most trades.
Win rate alone doesn't pay. Risk-to-reward decides whether your wins can outweigh your losses. Aim for reward that's a multiple of your risk, and let it run.
Beginner tips
- Aiming for at least 1:2 lets you be wrong often and still profit.
- Never widen your stop mid-trade to avoid being stopped out — that destroys your R:R.
- Cutting winners early and holding losers is the opposite of good risk-to-reward.