In the financial market, just having the 'urge to make money' is not enough; you also need to know when to bet and when to retreat. At this point, the risk-reward ratio (RRR) comes into play.

Simply put, the risk-reward ratio helps you clarify: Is this trade worth the risk?

One, what is the risk-reward ratio?

The formula is simple:
Risk-reward ratio = Expected loss ÷ Expected profit.

For example: If you plan to enter a certain stock, expecting to earn 300 yuan and willing to lose a maximum of 100 yuan, then the risk-reward ratio for this trade is 1:3. In other words, for every 1 yuan of risk, you have the chance to earn 3 yuan—this calculation is worth making.

Most professional traders set at least a 1:2 ratio, so even if they only win half the trades, they can still be profitable.

Two, why is the risk-reward ratio so important?

No matter if you are a beginner or a seasoned trader, those who understand how to analyze the risk-reward ratio are usually calmer and better at 'calculating.' This indicator can help you achieve several things:

  • ✅ Control risk: Don't get knocked down by one failure.

  • ✅ Increase tolerance for error: Even with a low win rate, you can sustain the game by 'winning big and losing small.'

  • ✅ Establish patterns: Transition from 'feeling trading' to 'strategy trading.'

Three, how to calculate the risk-reward ratio? How to use it in practice?

Just follow these four steps, and you can handle it:

  1. Decide on the entry price.

  2. Set the stop loss (can refer to support levels, moving averages, or ATR indicators).

  3. Set profit targets.

  4. Apply the formula: Loss ÷ Profit = RRR.

👉 If the ratio is less than 1:1 (earning less than losing), it's best not to touch this trade.

Four, these tools can help you better set the RRR

You don't need to rely on gut feeling; using tools can make your efforts more effective:

  • 📈 TradingView's long and short tools: Clearly indicate entry, stop loss, and target levels.

  • 🔁 ATR indicator: Used to measure volatility, helping you set more reasonable stop losses.

  • 🔍 Support and resistance levels: Use technical analysis to calculate appropriate entry and exit points.

  • 🌀 Fibonacci tools: Identify potential bounce/resistance points.

  • 🕵️‍♂️ Price Action: Observe candlestick changes to determine market direction.

Five, real cases: High win rate ≠ making money!

Let's look at two common scenarios👇


🧠 Case A: High win rate, but always losing.

  • Earn 50 yuan each time.

  • Lose 100 yuan each time.

  • Win rate: 70%.

  • RRR: 1:0.5.

  • Result: Long-term losses.

💡 Case B: Low win rate, but profitable.

  • Earn 150 yuan each time.

  • Lose 50 yuan each time.

  • Win rate: 40%.

  • RRR: 1:3.

  • Result: Long-term stable profit.

➡️ Conclusion: It's not about how many times you win, but how much you win and lose each time.

Six, common mistakes traders make (how many have you made?).

  1. Misconception: Just looking at the win rate gives you peace of mind❎

  2. Correct view: Without pairing with RRR, a high win rate can still lead to losses⭕

  3. Misconception: Setting a distant stop loss is safer❎

  4. Correct view: It only makes the loss bigger⭕

  5. Misconception: Setting ultra-distant profit targets is better❎

  6. Correct view: Unsubstantiated targets will only prevent you from achieving them forever⭕

  7. Misconception: Calculating RRR is too troublesome❎

  8. Correct view: Not assessing risk is the biggest risk⭕

Seven, a few things you should do before and after trading ✅

  • Evaluate RRR before each trade.

  • Don't make 'unprofitable trades.'

  • Use technical analysis to assist you in setting stop losses and targets.

  • Review trade records weekly to see if the overall risk-reward ratio is reasonable.

  • Without a good RRR, even the highest skills won't hold up for long.

Conclusion: True experts are not afraid of losing; they are only afraid of losing without value.

The market is not about who wins more, but about who can control losses and let profits run.

The risk-reward ratio is your measuring stick, helping you assess whether each trade is a 'risk worth taking.'

So before you plan to enter a trade next time, ask yourself one question:

"Is the risk I'm taking in this trade worth it?"

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#风险回报比