Risk-to-reward ratio explained simply
Risk-to-reward compares how much you're risking to how much you stand to gain. A 1:2 ratio means you're risking $10 to potentially make $20.
This matters because it changes how often you actually need to be right. With a 1:2 ratio, you can be wrong more than half the time and still come out ahead overall — as long as you actually let the winners run to target and respect the stop on losers.
A common trap: taking trades with a 1:1 or worse ratio, which means you basically need to be right almost every single time just to break even.
Risk-to-reward and win rate are a package deal, not separate ideas. A 1:3 ratio strategy can be profitable even winning only 30% of the time; a 1:1 ratio strategy needs to win well over half the time just to break even after costs. Knowing your own strategy's real numbers, from your journal, tells you which kind of system you're actually running.
It's tempting to move a take-profit further away mid-trade because "it's going so well." Occasionally that pays off. More often, it turns a planned 1:2 win into a round trip back to breakeven or worse, because the plan changed after the fact instead of before it.
Key takeaway
A good risk-to-reward ratio means you don't need to be right all the time — just right often enough, by the math.
Example
Risking $10 to make $20 means you can lose 6 out of 10 trades and still profit overall — as long as the 4 winners actually reach target.
Try this
Take your last 3 trades and work out the real risk-to-reward on each — what you actually risked versus what you actually made or lost, not what you planned.
This lesson is part of the free TDWK Academy — 40 lessons from zero to funded trader, with progress tracking and a certificate exam.
Continue in the full Academy →