đ What is the Risk:Reward ratio?
Risk:Reward (R:R) compares how much you can lose on a trade with how much you hope to make. Risk $100 to make $300 and your R:R is 1:3, usually written as "3 to 1".
It answers one simple question before you click buy: is this trade even worth taking?
đ Live chart in the cover and in the image post below.
đ How to work it out
⢠Step 1: mark your stop-loss (where the idea is wrong). Two weeks ago we covered stop placement
⢠Step 2: mark your target (the next clear ceiling on the chart, not a dream number)
⢠Step 3: risk = entry minus stop. Reward = target minus entry
⢠Step 4: divide reward by risk. Entry $100, stop $95, target $115 = $15 / $5 = 3:1
đ How traders use it
⢠Many traders only take trades with 2:1 or better
⢠Why it matters: at 1:1 you must win more than half your trades just to break even. At 2:1 you break even winning one in three. At 3:1, one in four
⢠Combine it with last week's lesson: position sizing sets HOW MUCH you lose when wrong, R:R decides if the trade is worth it at all
⢠If the ratio is poor, don't move your stop closer to "fix" it. Wait for a better entry, or skip the trade
𧪠Live example: $BTC right now
⢠Overnight BTC fell to $62,006 (01:00 UTC), its lowest level since mid-July, then bounced back to about $64,930
⢠The nearest ceiling is $67,523 (yesterday's high). The old floor at $70,000 sits above it
⢠Buying here at $64,930 with a stop at $61,800 (just under the low): risk about $3,130, reward to $67,500 about $2,570. That's 0.8:1, a poor trade
⢠Same idea, target $70,000: reward about $5,070, so 1.6:1. Better, but still under 2:1
⢠Wait for a dip to $63,000 with the same stop: risk $1,200, reward to $67,500 is $4,500. That's about 3.7:1
⢠Same coin, same day, very different trades. The entry changes everything
â ď¸ Common mistakes
⢠Picking a far-away target just to make the ratio look good
⢠Moving the stop closer after entering so the numbers "work"
⢠Ignoring win rate: a 5:1 setup that almost never hits is not a gift
⢠Chasing a big candle, which usually leaves a bad ratio
â Quick checklist
⢠Stop from the chart first
⢠Target = the next real ceiling or floor
⢠Reward at least 2x the risk
⢠If it's under 2:1, wait or skip
⢠Then size the trade with the 1-2% rule
đŹ What's your minimum R:R before you take a trade: 1:1, 2:1 or 3:1? đ
Not financial advice. DYOR.