What Is Risk Reward Ratio?
Risk reward ratio compares how much you are risking on a trade versus how much profit you expect to make. It is one of the most important concepts in trading because it defines whether a strategy is mathematically profitable.
For example, if you risk $100 to make $300, your risk reward ratio is 1:3. This means every $1 risked has the potential to return $3.
Example Calculation
- Entry Price: $100,000
- Stop Loss: $99,000
- Take Profit: $103,000
- Risk: $1,000
- Reward: $3,000
Result: 1:3 Risk Reward Ratio
Why It Matters
Many traders focus only on win rate, but professionals focus on expectancy. A strategy can be profitable even with a 40% win rate if the reward is larger than the risk.
This is why most traders aim for setups with at least a 1:2 or 1:3 ratio.
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Open Calculator →Common Mistakes Traders Make
- Entering trades without stop loss
- Ignoring reward potential
- Over-risking capital
- Emotional decision making
Final Thoughts
Risk reward ratio is the foundation of disciplined trading. If you consistently manage risk, profitability becomes a mathematical outcome rather than luck.