May 2, 2025 - OneRoyal Academy

Build your Strategy- Risk to Reward Ratio

In the world of trading, success isn’t just about picking winners it’s about managing risk. One of the most overlooked, yet vital, tools in a trader’s toolkit is the risk-to-reward ratio. Whether you’re new to the markets or a seasoned investor looking to tighten your strategy, this ratio is the compass that helps keep your trades on course. What is the Risk-to-Reward Ratio? At its core, the risk-to-reward ratio measures how much you stand to gain compared to how much you could lose. Let’s say you’re risking £100 on a trade with a potential profit of £300. That’s a 1:3 risk-to-reward ratio. You’re risking one unit to potentially gain three. The higher the reward compared to the risk, the better the setup in theory. Why Does it Matter? A strong ratio helps traders stay disciplined. It prevents emotional decisions and helps ensure that even if only a few trades are winners, they can still outweigh multiple small losses. Consistency is key. You might lose six out of ten trades, but if your winners return double or triple your risk, you can still come out ahead. Common Pitfalls Many traders, especially early on, focus too heavily on win rates. But a high win rate with poor risk-to-reward can still lead to losses. Conversely, a lower win rate with smart ratios can be very profitable. It’s not just about being right it’s about being profitable when you are. Putting It Into Practice The most successful traders approach every position with a plan. Before entering a trade, ask: “What am I willing to lose, and what am I aiming to gain?” Set stop-loss and take-profit levels accordingly. Tools like chart patterns, support/resistance zones, and volatility indicators can help identify sensible entry and exit points. Final Thoughts Trading without attention to the risk-to-reward ratio is like sailing without a map. It might be exciting at first, but eventually, you’ll lose your bearings. By mastering this simple yet powerful concept, traders can tilt the odds in their favour turning the unpredictable nature of markets into a game of controlled

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Build your Strategy- Building a Traders Journal

Build your Strategy- Risk to Reward Ratio