Risk-Reward Ratio
Risk-reward ratio compares the potential loss of a trade (distance to stop loss) against the potential gain (distance to take profit). A 1:3 ratio means you risk $1 to make $3.
Understanding the Concept
You don't need to win 90% of the time. With a 1:3 risk-reward, you only need to be right 35% of the time to be profitable. That's the power of asymmetric risk. Most losing traders take $500 losses trying to make $200 gains. They win 70% of trades and still lose money. Winners do the opposite—small losses, big wins. Before entering any trade, measure the distance to your stop and your target. If you're risking $1,000 to make $800, don't take the trade. Minimum should be 1:2. Great traders target 1:3 or better. This one concept can transform your P&L.
Real-World Example
Bitcoin's at $45,000. Your stop's at $44,000 (risk $1,000). Your target's $48,000 (gain $3,000). That's a 1:3 risk-reward. Even if you lose twice and win once, you're profitable.
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