Risk-Reward Ratios Explained: How to Trade Less and Earn More

[cryptoenthusiast]

​​If you’ve been trading for a while, you’ve probably had one of those weeks where you take 15 trades, stress over every tick, barely sleep – and somehow, your P&L ends up red anyway.

Meanwhile, someone in your Discord chat casually posts their “one trade of the week” that banked more than your entire month.

The difference? They understand risk-reward ratios (unless they’re social-media influencers and have a course to sell). The ones that get risk-reward ratios right aren’t trading more, they’re trading less, better.

And that’s what we’re diving into today: how to use risk-reward to stop overtrading, focus on higher-quality setups, and finally give your capital the respect (and break) it deserves.

What Risk-Reward Really Means

At its core, the risk-reward ratio (RRR) tells you how much you’re willing to lose compared to how much you aim to gain. But don’t let the simplicity fool you – mastering this concept separates the true traders from the exit liquidity.

Say you’re risking $100 to make $300. That’s a 1:3 risk-reward ratio – for every $1 on the line, you’re targeting $3 in return.

The beauty is, you don’t need to be right most of the time to make money. At a 1:3 ratio, you can lose six trades out of ten and still come out ahead. That flips the game from “I need to be right” to “I just need to manage risk.”

But, believe it or not, most traders do the opposite. They risk $300 to make $100, cut winners too early, and widen stops when trades go south. That’s not risk management; that’s donation season.

Why This Isn’t Just About Math

Risk-reward ratios look clean on paper, but in real life, psychology can ruin everything.

Picture this:
You plan a beautiful 1:3 setup.
The trade starts working, you’re up 1R, and you panic.
You close early “just to lock in profits.”
If you’ve been around for a while, you’ve heard the saying “You never go broke taking profits.” True. But cutting winners early might mean missing out, hitting your goals slower or not hitting them at all.

Pro tip: once you’re up 1R, consider putting a stop at breakeven and let your take profit stay where you set it initially.

Because there’s a flip side, too. When trades go against you, emotions tell you to give it a little more room. You move your stop. Then you move it again. Suddenly, your carefully planned 1:3 trade becomes a 3:1 loser.

This is where discipline comes in. A risk-reward plan only works if you have the discipline to stick to it. Otherwise, you’re trading vibes, not setups.

The Sweet Spot for Most Traders

There’s no universal “best” ratio, but for most retail traders these setups work fine:
Day traders often aim for around 1:1 to 1:2
Swing traders typically prefer 1:3 to 1:4
Position traders can stretch to 1:5 or higher
Why? Higher timeframes give price more space to breathe. If you’re scalping, you can’t realistically aim for a 1:5 setup unless you enjoy watching charts like they’re Netflix and crying when spreads eat your edge.

But here’s where traders mess up: Instead of finding setups that naturally offer good ratios, they force them. They shrink stops to chase a flashy 1:6 RRR and end up getting wicked out by noise. Quality setups beat aggressive plays more often than not.

Asymmetric Risk-Return: The Home Run Setup

Let’s talk about asymmetric bets – trades where the upside massively outweighs the downside. Think 1:10, 1:15, or even 1:20 setups.

These are rare, but they’re game-changers when they hit.

Imagine risking $100 with a tight stop on a breakout setup. If price pops and you catch the move early, you could ride it for $1,500 or more. That’s a 15R trade – the kind that can pay for weeks, sometimes months, of smaller losses.

Here’s a recent example in

GBPUSD
. The pair hit a double top in mid-August and immediately reversed, piercing the $1.3590 (a prior peak) by just 5 pips. Say you spotted that double-top formation and shorted with a 10-pip stop.

You’d survive the rise and then enjoy a 200-pip reward. That’s 20R in the bag, provided you exited right before the trend turned.

But here’s the trade-off:
You’ll get stopped out more often.
You need patience to let the winners actually run.
You have to accept discomfort – watching price retrace without panic-selling your position.
The market sharpshooters who master asymmetric setups don’t chase them every day. They stalk clean breakouts, major trend reversals, or high-conviction catalysts – and when the trade lines up, they size big, set a tight stop, and let the probabilities do the heavy lifting.

It’s less about being right every time and more about letting one big win offset multiple small losses.

🧩 Making Risk-Reward Work for You

Understanding ratios isn’t enough. You need a process:
Start with risk first
Decide how much you’re okay losing per trade – most pros cap it at 1–2% of account size.
Find logical stops, not emotional ones
Set stops based on structure – below support, above resistance, or at levels where your idea is simply wrong.
Set realistic targets
Don’t dream of 1:10 on a choppy Tuesday unless there’s a major catalyst to back it up.
Let math guide position sizing
Smaller stops mean larger position sizes for the same risk, but stay consistent with your capital exposure.
By planning before you enter, you flip the game from guessing to executing. That’s when risk-reward stops being theory and starts being strategy.

Risk-Reward in Different Market Conditions

Markets change character, and your RRR should adapt too.
In strong trending markets, you can aim for bigger ratios since momentum carries trades further.
In range-bound conditions, scaling back to 1:1.5 or 1:2 makes sense – breakouts fail more often.
During news-heavy weeks, either widen stops or stay flat if you’re risk-averse. Chasing trades when Powell’s mic is on? Risky business.
The smart traders bend their risk-reward ratios based on volatility instead of forcing the same plan everywhere.

️ Trade Less, Profit More

Here’s the counterintuitive truth: the fewer trades you take, the more money you’ll likely make. In other words, less is more.

Focusing on high-quality setups with favorable RRRs means:
Less noise
Less overtrading
More time for actual analysis instead of gambling
You don’t need to catch every move. Stick to your RRR strategy, take care of the losses, and let profits take care of themselves.

The TradingView Edge

This is where tools make life easier:
Use Supercharts to visualize risk-reward zones before you enter.
Once inside a chart, navigate to the left-hand toolbar and spot the icon where it says Projection. Pick Long position for long risk-reward ratio, and Short position for short risk-reward ratio. Here’s a helpful tutorial in case you need some guidance.
Set alerts at key levels so you’re not glued to your screen.
Scan with screeners to find setups with volatility and structure that match your target ratios. heatmaps can help, too.
And finally, check out the newest product we launched, Fundamental Graphs, allowing you to compare plenty of metrics across multiple companies (we’re talking earnings, cash flows, net income, revenue, all that good stuff).
The Takeaway

Risk-reward ratios aren’t a thing to consider – they’re a pillar of profitable trading. You don’t need to predict the market perfectly; you need to structure your trades so that your wins pay for your losses, and then some.

For most traders, the shift is simple:
Stop chasing every setup.
Start filtering for trades where the upside dwarfs the downside.
And when you get the rare asymmetric winner, ride it like your P&L depends on it – because it does.