How it works
For each trade plan, mark the entry, the stop loss, and the target. The distance from entry to stop is the risk in price units. The distance from entry to target is the reward. The ratio is reward divided by risk. A trade with 20-pip stop and 60-pip target has 1:3 risk-reward.
Example
Strategy A: 60 percent win rate, 1:1 risk-reward. Expectancy per trade is (0.6 × 1) − (0.4 × 1) = 0.2. Strategy B: 40 percent win rate, 1:3 risk-reward. Expectancy per trade is (0.4 × 3) − (0.6 × 1) = 0.6. B is three times more profitable per trade despite losing more often. Asymmetric payoff beats high win rate when properly sized.
Why it matters
Setups with poor risk-reward only work with a very high win rate, which is rare and hard to maintain. Setups with strong 1:2 or 1:3 risk-reward tolerate normal 35 to 50 percent win rates. Always plan stop and target before entry, compute the ratio, and skip trades where the ratio is worse than your minimum threshold. The math is unforgiving on negative expectancy regardless of how good a setup looks.
