In this lesson, you will learn what the <strong>risk reward ratio</strong> means, how to calculate it, and how traders use 1:2 and 1:3 setups to manage risk. You will also see practical examples and common mistakes to avoid.
What Is the Risk Reward Ratio?
The <strong>risk reward ratio</strong> compares the amount you are willing to risk on a trade with the amount you are trying to make. It is usually written as <strong>1:2</strong>, <strong>1:3</strong>, or another similar format.
The first number is the <strong>risk</strong>. The second number is the <strong>reward</strong>.
For example:
This matters because trading is not about winning every trade. No trader can do that. Risk management is about making sure your winning trades can cover your losing trades over time.
A few key terms:
If you risk $25 on a trade, then 1R = $25. A 2R profit means $50. A 3R profit means $75.
How to Calculate Risk and Reward
To calculate your risk reward ratio, you need three prices: your entry price, your stop-loss, and your take-profit.
For a long trade, which means you buy first and hope the price rises:
Example:
You buy a token at $10.00. Your stop-loss is $9.50. Your take-profit is $11.00.
You are risking $0.50 to try to make $1.00. That is a <strong>1:2 risk reward</strong> setup.
For a short trade, which means you sell first and hope the price falls, the math is reversed:
Example:
You short a token at $20.00. Your stop-loss is $21.00. Your take-profit is $17.00.
You are risking $1.00 to try to make $3.00. That is a <strong>1:3 risk reward</strong> setup.
The same idea works on spot, futures, forex, stocks, and crypto markets. If you are practicing on an exchange such as CoinW (https://www.coinw.com/en_US/register?r=3443555), you can use the chart, order panel, and calculator tools to plan these levels before entering a trade.
Practical Examples: 1:2 and 1:3
Let us compare two simple examples using a $1,000 trading account. A beginner should usually risk only a small part of the account on one trade. For this example, the trader risks <strong>1% per trade</strong>, which is $10.
Example 1: 1:2 Risk Reward
If the trade loses, the account drops from $1,000 to $990. If the trade wins, the account rises from $1,000 to $1,020.
Now imagine 10 trades with a 1:2 setup:
The trader won only 4 out of 10 trades, but still ended positive because the winners were twice as large as the losers.
Example 2: 1:3 Risk Reward
Now imagine 10 trades with a 1:3 setup:
This trader won only 3 out of 10 trades and still made a profit. This shows why R ratio trading can be powerful. A trader does not need to be right all the time if the average win is much larger than the average loss.
However, a higher target is not always better. A 1:3 target may be farther away, so the market may not reach it as often. Beginners should not choose 1:3 just because it looks better. The target must make sense based on the chart.
How to Use R Ratio Trading in a Real Plan
The goal is not to force every trade into a perfect ratio. The goal is to plan each trade before entering.
A simple trade planning process:
1. <strong>Find your setup</strong>: Decide why you want to trade. For example, price may be bouncing from support. Support is a price area where buyers have stepped in before.
2. <strong>Choose your entry</strong>: Decide the price where the trade becomes valid.
3. <strong>Place your stop-loss</strong>: Put it where your trade idea is wrong, not just where it feels comfortable.
4. <strong>Choose your take-profit</strong>: Look for a realistic target, such as a previous high, resistance level, or measured move. Resistance is a price area where sellers have stepped in before.
5. <strong>Check the ratio</strong>: Calculate whether the setup offers at least 1:2 or another ratio that fits your plan.
6. <strong>Adjust position size</strong>: Position size means how much you buy or sell. Set it so your loss stays within your risk limit.
Here is a simple position size example:
To risk $20 total, you can buy 10 coins because $20 divided by $2 equals 10. If price hits the stop-loss, the planned loss is about $20 before fees and slippage. <strong>Slippage</strong> means getting filled at a slightly different price than expected, often during fast market movement.
This is why the risk reward ratio should be part of a full plan, not the only rule.
Common Mistakes Beginners Make
Beginners often understand the math but still misuse the idea. Watch out for these common mistakes:
A practical beginner rule is to risk a small fixed percentage, such as 0.5% to 1% per trade, and look for trades where the potential reward is at least twice the risk. This does not guarantee success, but it helps prevent one bad trade from causing major damage.