Many traders spend years searching for the “perfect entry.”
In reality, entries matter far less than risk–reward.
A trader can be wrong more often than right and still make money—if the risk–reward strategy is correct. On the other hand, even a high win rate becomes meaningless when losses are larger than wins.
This article explains risk–reward strategy from first principles, without hype or shortcuts. It is the most important concept in this entire Trading Strategies series and the foundation upon which every other strategy depends.
What Is a Risk–Reward Strategy?
A risk–reward strategy defines the relationship between:
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Risk: how much you are willing to lose on a trade
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Reward: how much you expect to gain if the trade succeeds
This relationship is expressed as a risk–reward ratio (R:R).
Example:
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Risk: $100
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Potential reward: $300
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Risk–Reward Ratio: 1:3
This means you are risking one unit to potentially gain three units.
Risk–reward strategy is not about predicting price direction.
It is about controlling downside before thinking about upside.
Why Risk–Reward Matters More Than Win Rate
One of the most common misconceptions in trading is that a high win rate equals profitability.
This is false.
Example A: High Win Rate, Poor Risk–Reward
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Win rate: 70%
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Risk–Reward: 1:0.5
After 10 trades:
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7 wins × $50 = +$350
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3 losses × $100 = –$300
Net result: +$50
One mistake can wipe out weeks of effort.
Example B: Low Win Rate, Strong Risk–Reward
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Win rate: 40%
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Risk–Reward: 1:3
After 10 trades:
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4 wins × $300 = +$1,200
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6 losses × $100 = –$600
Net result: +$600
This is why professional traders focus on expectancy, not win rate.
The Concept of Trading Expectancy
Trading expectancy answers one question:
“If I repeat this strategy many times, what is the average outcome per trade?”
The formula is simple:
Expectancy = (Win Rate × Average Win) – (Loss Rate × Average Loss)
Risk–reward directly affects expectancy.
Without a positive expectancy, no strategy can survive long-term.
Common Risk–Reward Ratios in Trading
There is no single “best” risk–reward ratio, but some are used more frequently than others.
1:1 Risk–Reward
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Break-even before costs
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Requires very high accuracy
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Rarely sustainable long-term
1:2 Risk–Reward
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Balanced approach
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Can be profitable with ~40% win rate
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Common among swing traders
1:3 and Higher
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Strong asymmetric payoff
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Lower win rate acceptable
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Requires patience and discipline
For most traders, 1:2 or 1:3 provides the best balance between realism and profitability.
Risk–Reward vs. Strategy Type
Different trading strategies naturally support different risk–reward profiles.
Swing Trading
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Favors higher risk–reward ratios
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More room for price movement
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Lower emotional pressure
→ Works well with 1:2 to 1:4
Day Trading
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Shorter moves
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Faster execution
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More sensitive to costs
→ Commonly 1:1 to 1:2
Scalping
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Extremely tight stops
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Small targets
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Execution-dependent
→ Often below 1:1, but compensated by high frequency
(Not suitable for most traders)
How Risk–Reward Is Defined in a Trade
Every trade must answer three questions before execution:
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Where is the entry?
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Where is the stop loss?
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Where is the take profit?
Risk–reward is determined before the trade is placed, not adjusted emotionally afterward.
If you do not know these three levels clearly, you do not have a strategy.
Why Traders Struggle With Risk–Reward
Risk–reward sounds simple, yet most traders fail to apply it consistently.
Common reasons include:
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Fear of taking losses
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Moving stop loss to “give the trade more room”
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Closing winners too early
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FOMO after missing a move
These behaviors destroy risk–reward symmetry and turn trading into gambling.
Risk–Reward and Position Sizing
Risk–reward does not exist in isolation.
It must be combined with position sizing.
Professional traders typically risk:
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0.5% – 2% per trade
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Never more, regardless of confidence
This ensures:
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Drawdowns are survivable
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Emotional stability
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Long-term consistency
Risk–reward defines how much you can make.
Position sizing defines how long you can stay in the game.
Risk–Reward Is a Filter, Not a Guarantee
A good risk–reward setup does not guarantee success.
Instead, it acts as a filter:
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It eliminates low-quality trades
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It forces discipline
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It protects capital during losing streaks
Many trades should be rejected solely because the risk–reward is not favorable, even if the setup “looks good.”
Risk–Reward Across Different Markets
Forex
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Stable liquidity
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Predictable execution
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Well-suited for structured risk–reward models
Crypto
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Higher volatility
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Larger slippage risk
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Requires wider stops and adjusted targets
Gold & Indices
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Strong directional moves
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Session-dependent behavior
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Risk–reward varies by time of day
The principle remains the same, but execution must adapt to market characteristics.
How Risk–Reward Connects to Other Trading Strategies
Risk–reward is the common denominator across all strategies:
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Swing Trading uses it to survive drawdowns
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Breakout Strategy relies on asymmetric payoffs
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Pullback Strategy maximizes reward relative to risk
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ICT-based approaches collapse without strict risk control
Every strategy in this series assumes that risk–reward rules are already in place.
Conclusion
Risk–reward strategy is not optional.
It is the difference between speculation and professional trading.
You do not need to win often.
You do need to control how much you lose when you are wrong and how much you make when you are right.
Before searching for new indicators, new setups, or new strategies, master risk–reward. Without it, no trading strategy can succeed over the long term.
