Risk-to-Reward Ratio Explained

Risk-to-reward compares how much you stand to lose on a trade against how much you stand to gain. A 1:2 risk-to-reward ratio means you're risking $1 to potentially make $2.

This matters because win rate alone doesn't tell you if a strategy is profitable. A strategy that wins only 40% of the time can still be profitable overall if its average winning trade is meaningfully larger than its average losing trade.

In practice, this means it's worth calculating your risk-to-reward on a trade before entering it — not just whether you think it will "probably work." A trade with poor risk-to-reward can still be a bad trade even if your directional read turns out to be correct.