Risk-Reward Ratio: A Complete Guide
1. What is the Risk-Reward Ratio?
The Risk-Reward Ratio (RRR) measures how much potential profit you can earn for every unit of risk you take on a trade or investment.
Formula:
Risk-Reward Ratio = Potential Loss / Potential Gain
Example:
If you risk $100 to potentially gain $300, your risk-reward ratio is 1:3.
2. Why the Risk-Reward Ratio Matters
Helps manage risk and plan trades logically.
Avoids emotional decisions based on FOMO or fear.
Improves profitability over time, even with lower win rates.
Key to long-term survivability in trading or investing.
3. Ideal Risk-Reward Ratios
There’s no one-size-fits-all, but common ratios include:
1:2 – Risk $1 to make $2
1:3 – Risk $1 to make $3 (preferred by many pro traders)
1:1 – Risk equals reward (requires a high win rate)
The higher the ratio, the more profitable your system can be — even with fewer winning trades.
4. How to Calculate RRR (Step-by-Step)
Step 1: Identify Your Entry Price
Example: Buy ETH at $3,000
Step 2: Set Your Stop Loss (Risk Level)
Example: Stop loss at $2,800 → Risk = $200
Step 3: Set Your Take Profit (Reward Level)
Example: Take profit at $3,600 → Reward = $600
Step 4: Apply the Formula
RRR = Risk / Reward = $200 / $600 = 1:3
5. The Power of Risk-Reward in Your Win Rate
Risk-RewardNeeded Win Rate for Profit1:1> 50%1:2> 33%1:3> 25%
Even if you’re wrong 70% of the time, a 1:3 ratio can still make you money!
6. Strategies to Improve Risk-Reward
Use technical analysis to find high-probability setups.
Avoid chasing trades — wait for the best entries.
Let winners run — don’t cut profit short if the trade is going well.
Use tighter stop losses — but not too tight to get stopped out prematurely.
Pre-plan your trades — know your stop and target before entering.
7. Tools to Help With Risk-Reward
TradingView: Use the long/short position tool to visualize RRR.
Position Size Calculators: Determine lot size based on risk.
Broker Platforms: Many now calculate RRR on trade setups.
Spreadsheets: Custom RRR logs and trade journals.
8. Common Mistakes to Avoid
Ignoring the ratio completely or focusing only on win rate.
Moving stop losses away (increasing your risk).
Taking poor setups just to be in a trade.
Focusing only on potential profits, not losses.
Overtrading in hopes of forcing a high RRR.
9. Applying RRR in Different Markets
Crypto
Volatile, so aim for higher reward (1:3+).
Combine with trailing stops.
Stocks
Use support/resistance and volume zones to set targets and stops.
Forex
Due to small moves, a 1:2 ratio is often good. Use tight spreads and leverage carefully.
Options
Focus on risk-defined strategies like debit spreads or straddles to manage asymmetric payoffs.
10. Final Thoughts
The Risk-Reward Ratio is one of the most powerful yet overlooked concepts in trading and investing. When used properly, it can turn a mediocre win rate into a profitable strategy.
"It’s not how often you win that matters — it’s how much you win when you do."
