Risk-to-Reward Ratio (R\:R)

1. What is Risk-to-Reward Ratio?

The Risk-to-Reward Ratio (sometimes written as R:R) is a tool that helps traders decide if a trade is worth taking.

• Risk = how much you are willing to lose on a trade (your stop-loss distance).

• Reward = how much you expect to gain (your take-profit distance).

👉 Example: If you risk $100 to potentially make $300, your R:R = 1:3.

2. Why is it Important?

• Trading is about probabilities, not certainties.

• Even if you lose more trades than you win, a good R:R can still make you profitable.

• It helps you control emotions and avoid gambling behavior.

3. How to Calculate It?

Formula:

R:R=Potential Reward / Potential Risk

Step 1: Decide entry price.

Step 2: Set stop-loss (where you cut losses).

Step 3: Set take-profit (your profit target).

Step 4: Calculate ratio.

Example:

• Buy a stock at $50

• Stop-loss at $48 → risk = $2 per share

• Take-profit at $56 → reward = $6 per share

• Ratio = 6 ÷ 2 = 1:3

4. What Ratio is “Good”?

• Many day traders aim for at least 1:2 (risking $1 to make $2).

• Scalpers might accept 1:1 if win rate is very high.

• Swing traders may go for 1:3, 1:4, or more.

5. Example in Real Trading

• You take 10 trades with R:R = 1:2.

• Win only 4 trades, lose 6.

• Wins: 4 × $200 = $800

• Losses: 6 × $100 = $600

• Net: + $200 profit (even with only 40% win rate!).

6. Common Mistakes Beginners Make

❌ Setting take-profit too close, but stop-loss too wide.

❌ Moving stop-loss further away when trade goes bad.

❌ Not calculating R:R before entering.

✅ Key Takeaway:The Risk-to-Reward Ratio is your safety net. It ensures that you don’t need to win all the time to still make money.