Understanding Risk-Reward: Not Just a Ratio

It's easy to look at a 1:2 or 1:3 risk-reward ratio and think you've got a winning strategy. But often, traders oversimplify this concept. The raw ratio only tells part of the story; it needs to be weighed against your win rate. A 1:3 ratio is great, but if your win rate is only 20%, you're still likely to be underwater over a series of trades.

Conversely, a 1:1 risk-reward can be perfectly viable if your win rate is high enough – say, 60% or 70%. The real power of understanding risk-reward is in combining it with your typical win rate to calculate your expected value per trade. This provides a more realistic picture of profitability over time, rather than fixating on just one component. For example, chasing a 1:5 on $SI right now when it's up +5.42% intraday could mean setting an unrealistic target that's rarely hit, despite looking good on paper. It's about achievable targets relative to your stops, not just arbitrary numbers.