The risk-reward ratio compares the amount of risk taken on a trade to the potential profit. A simple example: risking $100 to make $300 gives you a 1:3 ratio. Successful traders often look for setups with at least a 1:2 or 1:3 ratio to make sure their wins outweigh their losses over time.
This strategy helps filter out low-quality trades and focus on those with higher probability and payoff. Even with a 50% win rate, if your average reward is double your risk, you’ll remain profitable in the long run.
Before entering a trade, always ask: Is the potential reward worth the risk?
