Been hearing this term thrown around constantly but never really understood the math behind it.
Is it just about setting stop losses and take profits or is there more to calculating proper risk reward ratios that actually matter for long term profitability?
It’s easy to talk about the math but executing it is the tough part for many traders.
Before entering a trade, always measure your stop loss against your take profit. For instance, if your stop is set at 50 pips and your target at 100 pips, that’s a solid 1:2 ratio.
The important part is to adhere to these levels. Adjusting your stop or take profit too soon can derail your entire strategy.
Set targets you can actually hit. There’s no point having a good ratio if it’s unrealistic.
It’s how much you risk versus how much you can make on each trade. Risk $100 to make $200? That’s 1:2.
Simple math, but it changes everything. I used to take 1:0.5 trades and couldn’t figure out why I kept losing money even when I was right half the time.
Now I won’t touch anything below 1:2. Even at 40% win rate, I still profit. Lose $100 on 6 trades, make $200 on 4 trades - that’s $600 lost vs $800 made, so I’m up $200.
With 1:3 ratios it’s even better. Same 4 winners at $300 each = $1200. Minus the $600 in losses = $600 profit.
The hard part? Actually sticking to your exits. I’ve watched traders set perfect ratios then move their stops or bail early when they panic.