L3.1 — What Risk-to-Reward Actually Measures

Risk-to-reward (R:R) is the ratio of the potential loss on a trade (risk) to the potential gain (reward). A trade with a 20-pip stop and a 40-pip target is 1:2 R:R. A trade with a 20-pip stop and a 20-pip target is 1:1. The R:R ratio determines how often you need to win to be profitable at breakeven — and how much profitability you generate above breakeven per winning trade.

At 1:1 R:R, you need a >50% win rate to be profitable. At 1:2, you need only >33%. At 1:3, you need only >25%. The higher the R:R, the lower the win rate required to be profitable. This is why traders who consistently achieve 1:2 or better can be profitable with win rates that feel psychologically discouraging.

The error is treating R:R as the only metric. A 1:3 target that is never hit because it sits beyond a major structural resistance zone is not a 1:3 trade — it is a trade where the realistic exit is 1:1 and the 1:3 number is wishful thinking. R:R must be measured against realistic, structurally supported targets.