Risk to Reward Ratio Explained: The Ultimate Guide to Smart Trading, Risk Management, and Business
Thousands enter market every day dreaming profit. Yet I saw why 90% of my friends failed first year. Not lack of capital. Not bad luck. They didn't understand one thing: Risk to Reward. I also failed same way before I learned this at AMERIMONDE TRADING.
I drew this 1 to 2 ratio in my notebook after blowing my second small account on XAUUSD. Look at my drawing above. Left side Risk $100 red, right side Reward $200 green. This one drawing saved my trading.
What Risk to Reward Means To Me - Simple
I ask one filter question before any trade: For every dollar I am willing to lose, how many can I make? That's it.
In my journal I write like this: 1:1 means I risk $100 to make $100. Same. Not good. 1:2 means I risk $100 to make $200. I risk 1 to make 2. This is minimum I take now. 1:3 means risk $100 make $300. Excellent. 1:0.5 means risk $100 to make only $50. I never take this. Bad setup.
Before I think profit, I first define risk. This discipline keeps my account alive. At AMERIMONDE TRADING I teach same.
How I Calculate - My $50 Example From My Drawing
I make it very easy. I need 3 prices only: Entry, Stop Loss, Take Profit.
Look at my calculation in middle of drawing: Entry $50.00, Stop $49.00. So risk = $1.00 per share. Take Profit $52.00, so reward = $2.00 per share. $1 risk / $2 reward = 1:2 ratio. Good trade.
Another example from my GOLD trade last week: I wanted buy GOLD at $2648. My stop was $2645, where my idea wrong. Risk = $3. My target $2656 resistance. Reward = $8. $3 risk $8 reward = 1 to 2.66. I took it.
Position Sizing - How I Don't Blow Account
My rule now: never risk more than 1% per trade. My account $10,000, so 1% = $100. See pink box in my drawing. If my risk per share is $1, I buy 100 shares. $100 risk / $1 = 100 shares. I buy 100 shares at $50. If hits target, profit 100 x $2 = $200. I risked $100 to make $200.
If my stop is wide $0.50 away, I buy less. If tight, I buy more. But always same $100 risk. This consistency is key. Before I used random lot size, that is why I blew account.
Why Ratio More Important Than Win Rate - Math That Changed Me
Beginners obsessed with winning 90%. I was same. Wrong. Let me prove with my own math from my notebook bottom left.
Trader A - High win rate but bad ratio: Risks $100 to make $20. Wins 9 of 10 trades. 9 wins x $20 = $180. 1 loss x $100 = -$100. Net = +$80 only. And 2 losses in row makes him negative. Very stressful.
Trader B - Me now, 40% win rate but 1:2 ratio: Risk $100 make $200. I win 4 of 10, lose 6. Losing 6 x $100 = -$600. Winning 4 x $200 = +$800. Net = +$200 profit. I lose more than I win, but I make double than 90% win rate trader! This is power.
Break-even I wrote: For 1:2 ratio, you need only 33% win rate to break even. Means you can be wrong 67% time and still not lose. For 1:3 ratio, need only 25% win rate. This is why pros focus on ratio, not accuracy.
See my calculation: 50% win rate → (0.5 x $200) - (0.5 x $100) = +$50 average profit. 33% win rate → (0.33 x $200) - (0.67 x $100) = ~$0 breakeven. You only need ~33% wins to be profitable! This line in my drawing changed
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