Risk-to-Reward and Stop-Losses
Use risk-to-reward to know the win rate you need, and place stops where your idea is actually wrong.
Being right more often is not the goal. Making more on winners than you lose on losers is. Risk-to-reward (R:R) is how you measure it.
Break-even win rate = 1 ÷ (1 + R)- R:
- Reward ÷ risk. Risk $100 to make $200 → R = 2
| R = 1 (risk $100, target $100) | Break-even at 50% wins |
|---|---|
| R = 2 (risk $100, target $200) | Break-even at 33% wins |
| R = 3 (risk $100, target $300) | Break-even at 25% wins |
At 1:2, you can be wrong two times out of three and still not lose money (before fees).
Placing a good stop
- Put the stop where the trade idea is invalidated — below the support you are buying, above the resistance you are shorting.
- Leave room for normal volatility: a stop inside the average daily range will be hit by noise.
- Never move a stop further away to avoid taking a loss. Moving it closer to lock in profit is fine.
Targets
Set the take-profit at a level the market can realistically reach — the next resistance for a long, the next support for a short. If the nearest realistic target only offers 1:1 or worse, the trade is usually not worth taking.
Key takeaways
- Break-even win rate = 1 ÷ (1 + R).
- Stops go where the idea is wrong, outside normal noise — and never get moved further away.
- Skip trades whose realistic target offers poor risk-to-reward.