Risk-Reward Ratio: How to Calculate and Use It for Smarter Trades

Early in my trading career, I placed what I thought was a “sure thing” trade. Tight stop, solid setup. But my target? Completely random—just a number I hoped it would hit. It didn’t. I got stopped out, then watched price move exactly where I expected… after shaking me out. The problem? I had no structured risk-reward plan.

The risk-reward ratio (RRR) is your edge in this game. It tells you if a trade is worth taking—not based on gut feeling, but probability.

1️⃣ How to Calculate Risk-Reward Ratio

It’s simple:

RRR = (Target Price - Entry) / (Entry - Stop Loss)

Example:

📌 Entry: $100

📌 Stop Loss: $95 (risk = $5)

📌 Target: $115 (reward = $15)

📌 RRR = 15/5 = 3:1

2️⃣ Why It Matters

A 3:1 RRR means that even if you win only 40% of trades, you’re still profitable. Without proper risk-reward, even a high win rate can leave you at breakeven—or worse.

3️⃣ The Myth of “Always 2:1 or 3:1”

Not every trade needs the same RRR. Some setups justify a 1.5:1 ratio (high probability), while others need 4:1 or more to be worth the risk. It’s about context.

4️⃣ How to Use RRR for Smarter Trades

📌 Predefine Your Stop & Target – Don’t adjust mid-trade emotionally.

📌 Consider Market Structure – A 3:1 trade is pointless if resistance is at 2:1.

📌 Size Properly – Even great RRR won’t save poor risk management.

Trade Wisely, Cheers!

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