#RiskRewardRatio
### **#RiskRewardRatio: The Trader's Compass**
A **risk-reward ratio (RRR)** measures potential profit against potential loss per trade. It’s a core metric for disciplined trading—helping traders assess whether a setup is worth entering.
#### **Key Concepts**
- **Calculation**:
- **Risk** = Entry price – Stop-loss price
- **Reward** = Take-profit price – Entry price
- **RRR** = (Potential Reward) / (Potential Risk)
- **Example**:
- Buy stock at **$100**, set stop-loss at **$95**, take-profit at **$110**.
- Risk = **$5**, Reward = **$10** → **RRR = 2:1**
#### **Why It Matters**
✔ **Better Trade Selection** – Avoids low-probability, high-risk trades.
✔ **Long-Term Profitability** – Even with a 50% win rate, a 2:1 RRR yields net gains.
✔ **Psychological Edge** – Reduces emotional trading by setting clear exit rules.
#### **Optimal Ratios**
- **Day Trading**: 1:1.5 or higher (scalpers accept lower due to frequency).
- **Swing/Position Trading**: 1:3 or better (fewer trades, bigger moves).
#### **Pitfalls**
❌ **Overestimating Reward** – Unrealistic profit targets skew RRR.
❌ **Ignoring Win Rate** – A 3:1 RRR means nothing if only 20% of trades win.
❌ **Setting Arbitrary Stops** – Stop-loss should align with market structure, not just RRR.
#### **Pro Tip**
Combine RRR with **win rate** to find your edge:
- **Minimum Win Rate Needed** = 1 / (1 + RRR)
- For 2:1 RRR → Need **33%+ win rate** to break even.
#### **Bottom Line**
A **strong risk-reward ratio** doesn’t guarantee success—but without it, even winning trades can lead to long-term losses. **Aim for 1:2+**, validate with backtesting, and stick to the plan! 🔥