When traders talk about risk-to-reward ratios, they’re referring to how much they're willing to risk compared to how much they aim to gain on each trade. For example, a 1:2 risk-to-reward ratio means you’re risking $1 to make $2. The interesting thing is, the higher your reward compared to your risk, the fewer trades you need to win to be profitable.
Let’s say your risk-to-reward ratio is 1:1 — you risk $100 to make $100. In this case, you need to win at least 50% of your trades to break even. But if your ratio is 1:2 — risking $100 to make $200 — you only need to win about 33% of the time to avoid losing money overall. With a 1:3 ratio, winning just 25% of your trades could still keep you in profit.
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