Risk and reward
Measure whether a setup deserves your capital.
01
Use R to compare trades
One R is the amount you decided to risk if the trade is invalidated. A loss at the planned stop is minus 1R; a profit twice that size is plus 2R. Thinking in R makes trades comparable even when account size, asset price and stop distance are different.
02
The target must be plausible
A reward-to-risk number is useful only when the target reflects the chart. Look for opposing support or resistance, prior swing points and available space. Do not invent a distant target simply to make a weak setup display an attractive ratio.
03
Expectancy joins the pieces
A strategy can win less often and still be viable when average wins outweigh average losses. It can also win often and lose money if occasional losses are uncontrolled. Review win rate, average win, average loss, fees and slippage together across a meaningful sample.
Practice exercise
Compare two hypothetical plans: one risks £50 to seek £100, while the other risks £50 to seek £35. Mark the reward-to-risk ratio for each and note whether the target is supported by chart structure.
Knowledge check
Does a 3:1 reward-to-risk ratio automatically make a trade good?
No. The entry, invalidation and target must all be realistic. A large ratio built on an implausible target is only a number, not an edge.
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