Mastering Risk/Reward Ratios

You don't need to be right most of the time to be profitable. With proper risk/reward management, you can be profitable with just a 40% win rate.

The Mathematics of Trading

Win Rate vs Risk/Reward

• 30% Win Rate: Needs 1:2.5+ risk/reward
• 40% Win Rate: Needs 1:1.5+ risk/reward
• 50% Win Rate: Needs 1:1+ risk/reward
• 60% Win Rate: Can profit with 1:0.7+

Finding High Risk/Reward Setups

1. Support and Resistance

• Enter near support with stop below
• Target next resistance level
• Often provides 1:3 or better

2. Breakout Trading

• Enter on breakout confirmation
• Stop at breakout level
• Target measured move

3. Trend Trading

• Enter on pullback to moving average
• Stop below swing low
• Target previous high or extension

Practical Examples

Example 1: Swing Trade

• Entry: $100
• Stop Loss: $98 (Risk: $2)
• Target: $106 (Reward: $6)
• Risk/Reward: 1:3

Example 2: Day Trade

• Entry: $50.00
• Stop Loss: $49.75 (Risk: $0.25)
• Target: $50.50 (Reward: $0.50)
• Risk/Reward: 1:2

Implementation Tips

1. Calculate Before Entry: Never enter without knowing R:R
2. Minimum Standards: Don't take trades below 1:1.5
3. Be Realistic: Ensure targets are achievable
4. Track Results: Monitor actual vs planned R:R

Common Mistakes

• Moving stops to breakeven too early
• Taking profits too quickly
• Ignoring market structure for targets
• Forcing trades with poor R:R

Master risk/reward, and you'll join the profitable minority of traders.