What Is Risk-to-Reward?
Risk-to-reward compares potential loss with potential profit.
Example:
Risk = £100
Potential profit = £200
That’s approximately 1:2 risk-to-reward.
You are risking £1 to potentially make £2.
Does Higher R Mean Better?
No.
A 1:5 setup isn’t automatically better than a 1:1 setup.
The relationship between:
- Win rate
- Average win
- Average loss
- Trading costs
- Strategy
matters.
Example
Strategy A:
80% win rate
Average win = £50
Average loss = £200
Strategy B:
40% win rate
Average win = £300
Average loss = £100
You need more information than simply looking at win rate.
Key Takeaways
- Risk-to-reward compares potential loss and potential reward.
- Higher R isn’t automatically better.
- R must be considered alongside the strategy’s actual performance.
Disclaimer
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
