Understanding Risk-Reward: It's More Than Just a Ratio

Too often I see newer traders fixate on hitting a perfect 1:2 or 1:3 risk-reward ratio, thinking that's the holy grail. While the ratio is crucial, it's really the probability of hitting your target versus your stop that makes it effective. A 1:3 ratio on a trade with a 20% win rate is far worse than a 1:1 ratio on a trade with a 70% win rate, for example. It's about finding high-probability setups that also offer a decent risk-reward, not just forcing a favorable ratio onto every trade. For instance, looking at $NFLX today, currently around $76.265. If you're eyeing a breakout trade, your stop needs to be at a logical technical level, not just an arbitrary percentage away, to give the trade room to breathe while still defining your maximum loss.