Risk/Reward: The Core of Profitable Trading
• Risk/reward ratio shows how much you’re risking vs. potential gain. A solid setup usually offers at least 1:2 or 1:3.
• Risk = stop-loss level where trade is invalidated.
• Reward = target where price is likely to go if the trade works.
• The higher the reward vs. risk, the lower your win rate needs to be to stay profitable.
• Trailing stops help capture bigger moves, but you won’t exit at the peak.
• Be impatient with losers, and patient with winners.
• Example: Buy 100 shares at $100, stop-loss at $97, target at $109:
• Risk = $300, Reward = $900 → 1:3 ratio
• Break-even win rate = 25%
Mastering risk/reward is essential — cut losses quickly, let profits run.