Risk-to-Reward Ratios
Understanding risk-to-reward is essential for profitable trading.
What is Risk-to-Reward (R:R)?
The ratio between your potential loss and potential profit.
- Risk: Distance from entry to stop loss
- Reward: Distance from entry to take profit
Calculating R:R
Example:
- Entry: 1.1000
- Stop Loss: 1.0950 (50 pips risk)
- Take Profit: 1.1150 (150 pips reward)
- R:R = 1:3
Why R:R Matters
With 1:3 R:R, you only need to win 25% of trades to break even:
- Win 1 trade: +3R
- Lose 3 trades: -3R
- Net: 0
Minimum R:R Guidelines
- Scalping: Minimum 1:1.5
- Day Trading: Minimum 1:2
- Swing Trading: Minimum 1:3
Improving Your R:R
- Enter at optimal levels
- Support/resistance zones
- After pullbacks
- Use tight but logical stops
- Below/above key levels
- Not arbitrary numbers
- Identify high-probability targets
- Previous highs/lows
- Fibonacci extensions
Common Mistakes
- Taking trades with poor R:R
- Moving stop losses
- Closing winners too early
- Not having clear targets
Lesson Discussion