Risk/Reward Ratio: The Essential Pre-Trade Evaluation
Risk Management · 6 min read
What is Risk/Reward Ratio?
Risk/Reward Ratio = Potential Profit ÷ Maximum Risk. It's the most overlooked concept among retail traders, yet one of the most important tools professionals use before every trade.
Calculation Example
- Entry: $100
- Stop-loss: $95 (risk: $5, −5%)
- Target resistance: $112 (potential gain: $12, +12%)
- R/R Ratio = 12 ÷ 5 = 2.4 (1:2.4)
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R/R Ratio Standards
- R/R > 2: Excellent trade, worth executing
- R/R 1.5~2: Acceptable with high-confidence entry
- R/R < 1.5: Poor risk/reward — skip or wait for better entry
R/R Ratio and Win Rate
Even with only 40% win rate, a consistent 3:1 R/R ratio produces long-term profits. Conversely, 70% win rate with 0.5:1 R/R (winning small, losing big) leads to long-term losses.
FAQ
What R/R ratio is good?
Generally aim for at least 1:2. If your win rate is above 60%, a 1:1.5 ratio may be acceptable.
How do I set the profit target?
Place targets at technical levels: previous highs, round numbers, or MA resistance. Avoid arbitrary targets.
Can I trade with poor R/R but high win rate?
Be cautious. High win rate / low R/R strategies are vulnerable to one large loss wiping out many small gains.