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.
See the reward and the risk before you trade
Every live call on ScarX shows the entry, the stop and the target, plus how that exact rule did on the asset over the last 3 years.
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