Risk-Reward Ratio
Definition
Risk-reward ratio (R:R) compares the potential loss to the potential gain on a trade. A 1:2 ratio means you risk $1 to potentially gain $2. Higher ratios allow profitability even with lower win rates.
The risk-reward ratio is one of the most important metrics for evaluating trade quality. A trader with a 1:3 risk-reward ratio only needs to win 25% of their trades to break even (excluding costs). Meanwhile, a trader taking 1:1 setups needs to win over 50% to be profitable.
For prop traders, favorable risk-reward ratios are especially important because you have a limited drawdown budget. Taking trades with poor R:R means you need a very high win rate to both stay within drawdown limits and hit your profit target. Professional prop traders typically aim for a minimum 1:2 risk-reward ratio on every trade.
The relationship between risk-reward ratio and win rate determines your expectancy (expected profit per trade). PropJournal tracks your average R:R, win rate, and expectancy across all trades, showing you whether your overall approach is mathematically sound for passing and maintaining prop firm challenges.
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