What It Is
Risk/Reward Ratio (R:R) compares the potential loss to the potential gain on a trade. A 1:3 R:R means you risk $1 to potentially make $3. It's calculated before entering a trade by comparing your stop-loss distance to your profit target distance.
Key insight: R:R determines whether your trading system is mathematically viable. With a 1:3 R:R, you only need to win 25% of your trades to break even. With a 1:1 R:R, you need 50%. Better R:R gives you more room for imperfect timing and lower win rates.
Most professional traders refuse to take trades below 1:2 R:R. The reason is simple: even good traders are wrong 40-50% of the time. You need asymmetric payoffs to overcome that reality.
Applying Risk/Reward
Identify your stop loss (where the trade is wrong) and your target (where you take profit). If the target is less than 2× the stop distance, skip the trade — the math doesn't work.
Express all trades in terms of R. If you risked $100 and made $300, that's a +3R trade. If you lost $100, that's -1R. Track your average R over many trades — this is your expectancy.
If the nearest logical target only gives you 1:1 R:R, don't extend it to 1:3 just to make the trade look good. Use the levels the chart gives you, not the levels you wish existed.
Apply this concept in combination with others. No single concept tells the whole story - confluence is key.
Continue through core concepts
Compare this reference with related structures and readings before applying it to a live chart.