What is Risk-Reward Ratio?
Risk-Reward Ratio (R:R) = Amount you can win / Amount you can lose per trade
If you risk $100 to make $200, that's a 1:2 ratio (or "1 to 2").
Why R:R Matters
R:R is the most important metric for profitability—more important than win rate, more important than fancy indicators.
Here's why:
Formula: Expectancy = (Win% × Avg Win) - (Loss% × Avg Loss)
Example: 40% Win Rate with 1:2 R:R
| Metric | Value | |---|---| | Win Rate | 40% | | Average Win | $200 | | Average Loss | $100 | | Expectancy | (0.40 × $200) - (0.60 × $100) = $50/trade |
You're profitable even though you lose 60% of trades.
The Magic of Ratios
Compare these three scenarios:
| R:R Ratio | Win Rate Needed | Outcome | |---|---|---| | 1:1 | 50%+ | Break even | | 1:1.5 | 40%+ | Profitable | | 1:2 | 33%+ | Highly Profitable | | 1:3 | 25%+ | Extremely profitable |
A 1:2 ratio means you only need to win 1 out of every 3 trades to be profitable long-term.
How to Achieve Good R:R
Step 1: Define Your Stop Loss
The distance from entry to stop loss = Risk per trade
Entry: $100
Stop Loss: $95
Risk = $5
Step 2: Calculate Target Price
Multiply risk by your desired ratio
Risk = $5
Desired Ratio = 1:2
Target = Entry + (Risk × 2) = $100 + $10 = $110
R:R = $5 loss / $10 gain = 1:2 ✓
Step 3: Check the Setup
Does price have room to reach your target before hitting your stop?
- Good setup: Lots of room to target, tight stop loss
- Bad setup: Target is very close, stop is very far
Minimum R:R by Strategy
| Strategy | Minimum R:R | Reason | |---|---|---| | Day Trading | 1:1.5 | High trade frequency | | Swing Trading | 1:2 | Medium frequency | | Long-term | 1:2 | Lower frequency | | Scalping | 1:0.75 | High win rate |
Common Mistakes
❌ Mistake 1: Chasing Profits
You see a trade with 1:1 ratio, then move target to 1:3. This is revenge trading and leads to losses.
Solution: Pre-define all your targets BEFORE you enter.
❌ Mistake 2: Moving Stop Losses
You enter with a $5 stop, then price drops, so you move it to $7 (bigger loss).
Solution: Write down your stop loss. Don't change it.
❌ Mistake 3: Ignoring R:R
You take trades with negative R:R "just to get some wins."
Solution: Every trade must have R:R ≥ 1:1.5 minimum.
Real World Example
Your Setup:
- Entry: $50
- Stop Loss: $48 (risk $2)
- Target: $54 (reward $4)
- R:R: 1:2
You take 10 trades:
- Win 4 trades: 4 × $4 = +$16
- Lose 6 trades: 6 × $2 = -$12
- Total: +$4 profit
You lost 60% of trades but still made money! That's the power of R:R.
ForgeEdge Calculates This for You
When you log a trade with:
- Entry price
- Stop loss
- Take profit
ForgeEdge automatically calculates your R:R and shows you if it's good before you enter.
Quick Reference
| Ratio | Win Rate Needed | Profitability | |---|---|---| | 1:0.5 | 67%+ | Hard to achieve | | 1:1 | 50%+ | Medium | | 1:1.5 | 40%+ | Good | | 1:2 | 33%+ | Excellent | | 1:3 | 25%+ | Elite level |
Target 1:2 minimum. Everything else follows from good R:R and discipline.
Remember: Great traders aren't the ones who win the most. They're the ones who win small and lose big, then manage it with position sizing.