📍 Core Concept

Risk/Reward Ratio

Evaluating trade quality through risk-to-reward analysis.

APOLLO ENCYCLOPEDIA

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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.

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Applying Risk/Reward

Calculate R:R before entry.

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.

R-multiples for tracking.

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.

Don't move targets to justify entries.

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.

💡Pro Tip

Apply this concept in combination with others. No single concept tells the whole story - confluence is key.

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