What is a good risk reward ratio?
Quick Answer
A minimum 1:2 risk-reward ratio is recommended, meaning you risk $1 to potentially make $2.
Detailed Explanation
The risk-reward ratio compares potential profit to potential loss on a trade. A 1:2 ratio means risking $1 to make $2. Professional traders typically aim for 1:2 or better. With a 1:2 ratio, you only need to win 33% of trades to break even, making consistent profitability more achievable even with lower win rates.
Key Points
- 11:1 requires 50% win rate to break even
- 21:2 requires only 33% win rate to break even
- 31:3 requires only 25% win rate to break even
- 4Higher ratios allow for more losing trades
- 5Balance between realistic targets and ratio
Example
Entry at $100, stop at $95 (risk $5), target at $110 (reward $10) = 1:2 risk-reward ratio.
Related Questions
How much should I risk per trade?
Professional traders typically risk 1-2% of their total account on any single trade.
How do I calculate position size?
Position size = (Account Risk %) × Account Balance ÷ (Entry Price - Stop Loss Price).
Where should I place my stop loss?
Place stop losses below key support levels, pattern lows, or recent swing lows - where the trade thesis would be invalidated.