Risk-Reward Ratio

The risk-reward ratio compares how much you stand to lose on a trade if your stop-loss is hit against how much you stand to gain if your target is reached. It is usually written as risk:reward — a 1:3 ratio means risking $1 to potentially make $3.

For example, buying ETH at $3,000 with a stop-loss at $2,900 and a take-profit at $3,300 risks $100 per coin to make $300, a 1:3 ratio. With that ratio, a strategy stays profitable even if only 30-40% of trades win, because the winners are three times the size of the losers.

The ratio's real value is forcing the math before entry: win rate and risk-reward together determine profitability, and neither means anything alone. A high win rate with terrible risk-reward (risking $300 to make $100) can still lose money overall; a modest win rate with strong risk-reward can be very profitable. A common misconception is that a good ratio alone makes a trade good — a 1:10 setup is worthless if the target is realistically never reached. The ratio must be based on plausible price levels, such as genuine support and resistance, not on wishful targets drawn to make the arithmetic look attractive.