The Power of Risk-to-Reward Ratio & How it Could Change Your Trading Forever

In the trading world, The majority obsess over entries. They look for the perfect candle pattern, the exact confirmation, or the latest trading indicator hack. But what if the real game changer had nothing to do with entries and everything to do with how much you're risking for how much you aim to gain?
This article will introduce the concept of risk-to-reward ratio (R:R). And if you master just one thing in trading this month, make it the following.

 

What Is the Risk-to-Reward Ratio in Trading?

Your risk-to-reward ratio tells you how much you’re willing to risk on a trade relative to your target profit.
Example:
If you decide to risk $1000 in order to make $2000, your R:R is 1:2.
If you decide to risk $500 in order to make $1500, your R:R is 1:3.

 

Why Risk-to-Reward Ratio of 1:2 Is a Game-Changer

Here’s why aiming for a 1:2 ratio or higher can transform your results, even if your win rate isn't perfect:

When you target twice the reward you’re risking, you give yourself room to make trading mistakes and still come out ahead.

 

What Risk-to-Reward Ratio Looks Like in Real Trading

Let’s say you spot a clean setup:

• You place your stop loss 500 points below your entry (based on structure or volatility).
• Instead of aiming for a quick scalp, you set your target 1000 points above.

Now, you only need to win 4 out of 10 trades to potentially come out profitable. What makes this even more powerful is how it shifts your mindset:

• You’re no longer chasing every move.
• You wait for trades where the math works in your favor.
• You avoid “break-even” trading habits that lead nowhere.
   

How to Calculate the Risk-to-Reward Ratio Effectively in Trading

To calculate your risk-to-reward ratio, follow this simple formula:
R:R = Potential Reward ÷ Potential Risk
Here’s how to break it down:

1. Determine your entry point
2. Set your stop-loss (how much you're willing to lose)
3. Set your take-profit (your target level)
4. Subtract your entry from both stop-loss and take-profit to get the risk and reward in points, pips, or dollars

Example:

• Entry: $100
• Stop-loss: $95 → Risk = $5
• Take-profit: $110 → Reward = $10
• R:R = $10 ÷ $5 = 1:2

Checking this ratio before entering a trade is crucial. If it happens to be below 1:2, you may want to reconsider or adjust your levels.

 

Common Mistakes Traders Make with R:R

• Forcing a target just to meet 1:2  Make sure the chart structure supports your Take Profit order. Don’t pick random numbers.
• Ignoring probability, not every trade will reach your 2R target. Try to be selective.

• Chasing trades with low R:R , a 1:1 or worse R:R often leads to burnout, especially when factoring spreads or slippage.

   

Try This on Your Next Trade

Before you place your next trade, do this quick checklist:

• What’s the risk (distance to stop)?
• Where’s a logical target (resistance/support, breakout, fib, etc.)?
• Is the R:R at least 1:2? If not, skip or rethink the entry.

Conclusion: Trade Smarter, Not More

You don’t need to win every trade to be a profitable trader. But you do need to make the math work in your favor. Mastering risk-to-reward puts you in control of your losses, your wins, and your growth.
Aim for a minimum of 1:2. Let the rest take care of itself.