Risk-Reward Ratios

The (R:R) answers one question before every trade: is this trade worth taking?

R:R = (Target Price - Entry Price) / (Entry Price - Stop Price)

Buy at $50, stop at $47, target $59:

Risk = $3, Reward = $9
R:R = 3:1, meaning for each $1 risked, you stand to gain $3.

Win Rate Determines Your Minimum R:R

Break-even R:R = (1 - Win Rate) / Win Rate

Why Professionals Aim for 2:1+

Even with a 60% win rate, pros target at least 2:1 R:R. Win rates degrade in real trading through slippage, emotional errors, and changing conditions. Higher R:R provides a margin of safety.

: Normalize Every Trade

R-multiples measure outcomes in units of initial risk (R). Risk $500 and make $1,500? That is +3R. Lose $500? That is -1R.

This normalizes all trades regardless of position size or stock price:

Average R: (+2 -1 +3 -0.75 +5) / 5 = +1.65R, a strong system.

You Can Be Wrong 60% of the Time and Still Profit

You do not need to be right on most trades. You need your winners to be larger than your losers.

Setting Realistic Targets

R:R only works if your target is achievable.

If the nearest resistance is only $2 above entry but your stop is $3 below, that is 0.67:1 R:R. The chart says skip it.

Do Not Manufacture R:R

Setting unrealistic targets to inflate R:R fools only you. If the chart shows resistance at $55, targeting $65 for a better ratio is self-deception. R:R is only meaningful with achievable targets.

The R:R Filter

This filter eliminates a large number of mediocre trades. You are protecting capital for trades with favorable math.

Win Rate + R:R Together

Key Takeaways

Risk-reward ratio = Potential profit / Potential loss; aim for 2:1 minimum
R-multiples normalize all trades to a common risk unit for better analysis
A 40% win rate with 2.5:1 R:R is more profitable than 70% win rate with 0.5:1 R:R
Base targets on the chart. Do not manufacture R:R with unrealistic targets

Try This

20 XP

Review your last 10 trades (or hypothetical setups). Calculate the R:R for each. How many had at least 2:1? Would results improve if you only took 2:1+ trades?

Disclaimer

This educational content is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future results. Trading involves risk of loss. You should consult a qualified financial advisor before making investment decisions. Swingfolio is a trade journaling tool, not a financial advisory service.