Understanding Risk-Reward: It's Not Just About Wins

Too many new traders fixate on their win rate, thinking a high percentage of winning trades automatically means profit. That's a rookie mistake. A good risk-reward ratio is arguably more important. It's simply the potential profit of a trade divided by the potential loss. If you're risking $1 to make $2, that's a 1:2 risk-reward. Even if you only win 40% of your trades, with a consistent 1:2 ratio, you'd still be profitable. Say you make 10 trades: 4 winners (+$8) and 6 losers (-$6) nets you $2. Focus on managing your downside, and let your winners run. Chasing high win rates with poor risk-reward often leads to small wins and catastrophic losses.