The risk/reward ratio helps to manage risk of losing money on trades. Even if a trader has some profitable trades, he will lose money over time if his win rate is below 50% with a 1:1 risk/reward. The risk/reward ratio measures the difference between a trade entry point to a stop-loss and a sell or take-profit order.
Comparing these two provides the ratio of profit to loss, or reward to risk.
What Does the Risk/Reward Ratio Tell You?
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Why should it matter?
To psychologically create a great risk to reward ratio you need to be very patient with winning trades and give them enough room and opportunity to play out for the most benefit but at the same time have no patience for losing trades and exit the moment you are proven wrong based on price action going where it shouldn’t go if the trade is going to work out in your favor.
Our Excel sheet also provides changing risk when scaling out. This is extremely helpful since you will reduce risk during the trade, which also makes it easier to let the trade run.
Creating good risk/reward ratios with high probability entries through stop losses & letting winners run is the core of all profitable trading.