Free Trading School · Level 5: Placing Smart Trades
The risk-reward ratio
The risk-reward ratio compares how much you can lose if the stop is hit with how much you can make if the target is hit. Risking $100 to make $200 is a 1:2 risk-reward, often written as a 2R target ("R" being the amount you risk).
Entry at 100, stop at 98 (risk 2), target at 104 (reward 4): a 1:2 risk-reward.
Risk-reward and win rate work together. With 1:2 trades you only need to win more than one trade in three to break even. With 1:1 trades you need to win more than half.
| Risk-reward | Break-even win rate |
|---|---|
| 1:1 | 50% |
| 1:1.5 | 40% |
| 1:2 | 33% |
| 1:3 | 25% |
Look for trades where the realistic target is at least twice the risk. It lets you be wrong more often than right and still grow.
Quick answers
The risk-reward ratio compares how much you can lose if the stop is hit with how much you can make if the target is hit. Risking $100 to make $200 is a 1:2 risk-reward, often written as a 2R target ("R" being the amount you risk).
Look for trades where the realistic target is at least twice the risk. It lets you be wrong more often than right and still grow.
1:3. $150 ÷ $50 = 3, so 1:3 or a 3R target.
Next lesson: Position sizing: the 1% rule