How the risk-reward ratio works
The risk-reward ratio compares what you stand to lose against what you stand to gain on a single trade. If you risk $100 to make $300, your risk-reward is 1:3. You set it before entering by placing your stop and your target, so you know the trade’s shape in advance. It is the single most controllable variable in trading, and the foundation of staying profitable even when you are often wrong.
Worked example
You take trades with a 1:3 risk-reward, risking $100 to make $300. Win just 4 out of 10 and you make 4 x $300 = $1,200 while losing 6 x $100 = $600, a net profit of $600 despite being wrong more than half the time. Flip it to 1:1 and the same 40% win rate loses money. The ratio is what lets a low win rate still win.
Why it pairs with position sizing
Risk-reward sets the shape of a trade; position sizing sets how much you risk on it. Together they decide your results far more than entry timing does. On Volity, negative balance protection caps the absolute worst case at your deposit, but it is disciplined risk-reward, refusing trades worse than about 1:2, that actually builds an account over time.
Why it matters
Most traders obsess over being right; professionals obsess over risk-reward, because a good ratio means you do not need to be right often to come out ahead. Decide your reward-to-risk before every trade and skip the ones that do not measure up. Related: R-multiple and drawdown.
Learn more in our learn trading hub.
