What is Risk/Reward?
R:R compares potential loss to potential profit.
Formula: R:R = Potential Profit ÷ Potential Loss
Example
- Entry: $100
- Stop: $98 (risk = $2)
- Target: $106 (reward = $6)
- R:R = $6 ÷ $2 = 3:1
Why It Matters
With a 3:1 R:R, you only need to be right 25% of the time to break even.
Minimum Thresholds
| R:R | Required Win Rate | Assessment |
|---|---|---|
| 1:1 | 50% | Minimum viable |
| 2:1 | 33% | Good |
| 3:1 | 25% | Excellent |
| 4:1+ | 20% | Outstanding |
Common Mistakes
- Moving stops - Increases risk after entry
- Taking profits early - Destroys R:R
- Ignoring R:R for "sure things" - No trade is sure
Key Takeaways
- Never trade less than 2:1 R:R
- Let winners run to planned targets
- R:R determines long-term profitability