Here's a fact that surprises most beginner traders: you can be wrong 60% of the time and still be profitable. How? Risk/reward ratio. It's the one number that changes everything about how you think about trading.
What Is Risk/Reward Ratio?
Risk/reward ratio (R:R) compares how much you stand to lose on a trade vs. how much you stand to gain. It's expressed as a ratio like 1:2, which means: for every $1 you risk, you aim to make $2.
The formula is dead simple:
Example: You buy at $100, set your stop at $97, and your take profit at $106. Your risk is $3, your reward is $6. That's a 1:2 risk/reward ratio.
Why This Number Matters More Than Win Rate
Most new traders obsess over being "right." They want a high win rate. But win rate without R:R context is completely meaningless. Here's why:
| Trader | Win Rate | R:R Ratio | Result per 10 trades | Profitable? |
|---|---|---|---|---|
| Trader A | 70% | 1:0.5 | +7 × $0.50 − 3 × $1 = −$0.50 | No ❌ |
| Trader B | 40% | 1:3 | +4 × $3 − 6 × $1 = +$6 | Yes ✅ |
| Trader C | 50% | 1:2 | +5 × $2 − 5 × $1 = +$5 | Yes ✅ |
| Trader D | 30% | 1:4 | +3 × $4 − 7 × $1 = +$5 | Yes ✅ |
Trader A wins 70% of their trades and still loses money. Trader D wins only 30% of their trades and is solidly profitable. R:R is what makes the difference.
What's a Good Risk/Reward Ratio?
The minimum most professional traders accept is 1:2 — meaning you're aiming to make at least twice what you're risking. Many of the strategies in ScarX target 1:3 or better, which means you only need to be right 25% of the time to break even.
If you can't find a setup where your take profit is at least 2× your stop loss distance, skip the trade. No setup, no trade. There will always be another opportunity.
How to Set Your R:R on Every Trade
The right order of operations matters here. Most beginners set a target price, then figure out where to put their stop. That's backwards. Here's the correct process:
- 1. Find the natural stop loss level first — where does the setup become invalid?
- 2. Calculate your risk: entry price minus stop loss
- 3. Multiply that risk by 2 (or 3) to get your minimum take profit target
- 4. Check if that target is realistic — is there a clear path to it with no major resistance in the way?
The Most Common R:R Mistakes
- Moving your stop loss when price goes against you — this destroys your R:R calculation entirely
- Taking profit early because you're nervous — locks in a worse R:R than planned
- Ignoring R:R on "obvious" trades — even high-conviction setups need a valid R:R
- Using the same R:R for every setup — volatile assets need wider stops, which changes the math
Never take a trade with an R:R below 1:1.5. You're paying the spread, there are slippage risks, and you need to account for the fact that you'll have losing streaks. An R:R below 1:1.5 doesn't give you enough margin to survive those streaks.
ScarX calculates R:R automatically
Every analysis on ScarX gives you an entry, stop loss, and take profit — with the R:R calculated instantly. No more manual math. Just clear, actionable levels.
Try it free →