Risk-Reward Ratios
Why this matters
Win rate alone is a vanity metric. A strategy that wins 70% but risks $300 to make $50 can still lose money. Risk-reward is the other half of expectancy.
Thinking in R — multiples of what you risked — lets you compare trades fairly and design setups that do not need perfection.
What Risk-Reward Means
Risk-reward compares potential profit to potential loss on a planned trade. If you risk $100 to target $200, that is 1:2 (risk one to make two).
Measure from entry to stop (risk) and entry to target (reward). Hope is not a target.
- Risk = entry to stop (dollars or R)
- Reward = entry to take-profit
- R:R = reward ÷ risk
1:2 Risk-Reward
Stop one unit below entry, target two units above — asymmetric payoff sketch.
Win Rate Math
At 1:1, you need to win more than about half the time after costs to profit. At 1:2, you can win less often and still come out ahead if losses stay controlled.
Example: risk $100, target $200. Two losses (−$200) and one win (+$200) scratch before fees. A bit better than 33% wins starts printing — as long as you actually take the full losers and winners as planned.
- Higher R:R → lower required win rate
- Lower R:R → you need to be right more often
- Fees and slippage raise the bar either way
Link to Expectancy
Expectancy ≈ (win% × average win) − (loss% × average loss). Risk-reward shapes average win vs average loss.
You can improve expectancy by cutting losers short, letting winners reach planned R, or selecting setups with better asymmetric structure — not by wishing for higher win rate alone.
- Asymmetric payoffs reduce pressure to be right constantly
- Moving targets to scratch winners kills R:R
- Track results in R, not only dollars
Realistic Targets
A fantasy 1:10 target past three resistance shelves is not a plan. Map reward to structure you can actually sell into.
Sometimes the honest R:R is 1:1.2. Then you need selectivity and execution quality — or you pass on the trade.
- Targets need liquidity and structure
- Pass when reward does not justify risk
- Partial profits can still preserve overall R if planned
Practical Habits
Before entry, write risk in R and planned reward in R. After exit, record realized R. Over time you will see whether your playbook actually delivers the asymmetry you assumed.
- Plan R:R before clicking
- Journal realized R every trade
- Cull setups that never reach targets
Key Takeaways
Remember these points
- •Risk-reward compares planned reward to planned risk.
- •Higher R:R lowers the win rate you need.
- •Expectancy depends on both win rate and payoff asymmetry.
- •Targets must be realistic structural levels.
- •Track performance in R-multiples.
Common Mistakes
Chasing win rate only
High win rate with terrible payoff still loses. Measure both sides.
Imaginary targets
Marking 1:5 on the chart without a place to exit is fiction.
Cutting winners and letting losers run
That inverts R:R and destroys expectancy even with "good" entries.
Quiz
0/4 answered1.Risking $100 to make $200 is an R:R of:
2.All else equal, improving R:R generally:
3.Expectancy depends on:
4.A useful habit is to:
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