Risk-to-Reward Ratio

Risk-to-reward compares what you are trying to make with what you have agreed to lose. It is not a probability. A 3-to-1 trade that wins 20 percent of the time loses money. A 1-to-1 trade that wins 60 percent makes money, before costs. The ratio is useful because it forces the target and the stop to exist as numbers, and because it stops you from taking a setup whose payoff cannot work even if you are good. It is computed from the planned prices and then recomputed from the fill. Chasing the entry silently destroys the ratio you used to justify the trade.

Calculate it before you send the order. If the ratio is below your minimum after costs, skip the trade or wait for a better price. Do not lower the stop to manufacture a ratio. A stop that is not at the invalidation is not a stop. It is a decoration that lets the ratio look pretty, and the market will hit it. After a sample of trades, compare planned R with realised R. If you plan 2 and realise 0.7, your exits are not the plan. The ratio on the screenshot was never your system.

Use a minimum ratio as a filter, typical written rules are somewhere around 1.5 or 2 for discretionary level trades, and then track the win rate that the filter produces. Raise the minimum and you take fewer trades with larger winners and, usually, a lower hit rate, because you are demanding targets that are farther away. There is no universally best number. There is a number that matches your holding period. Scalps often work at lower ratios with higher hit rates. Swings can demand more because they are wrong more often and for longer.

Treating a high ratio as a high-probability trade. The opposite is closer to true: distant targets are reached less often. Also computing the ratio from the low of the bar to the high, a path you did not trade. And ignoring costs on small ratios, where a 1.2 reward becomes a loss once the spread is paid twice.

The ratio assumes the stop and the target are both fillable. A gap through the stop makes the realised loss larger than 1R, so a system of 2-to-1 winners can still lose if the losers are 3R in practice. Track realised R, not planned R. The ratio also says nothing about how correlated the trades are. Ten 2-to-1 longs in the same sector are one bet with a decorative ratio.