Risk-Reward Ratio Guide

Both important, but must be balanced. Emphasizing either alone is a misconception. Truth: 1) High win rate low reward (like 70% win rate but R:R only 1:0.5) actually loses, because 7 wins at 0.5R, 3 losses at 1R, net 3.5R-3R=0.5R, after fee may lose; 2) High reward low win rate (like R:R 1:5 but only 10% win rate) also hard to profit, because psychological pressure enormous, hard to persist through 9 consecutive losses; 3) Optimal balance: 40-50% win rate with R:R 1:2-1:3, or 55-65% win rate with R:R 1:1.5-1:2. Formula: Expectancy = Win Rate × Avg Profit - Loss Rate × Avg Loss. Example: 50% win rate × 2R - 50% × 1R = 0.5R expectancy, long-term profitable. Recommendation: first test your strategy's true win rate, then set corresponding R:R target. Don't pursue unrealistic "high win rate + high reward", that's holy grail fantasy.

Expectancy is core metric for evaluating strategy profitability. Calculation formula: Expectancy in R = (Win Rate × Avg Profit in R) - (Loss Rate × Avg Loss in R). Example: your 100 trade data: 45 wins (45% win rate), avg profit 2.2R; 55 losses (55% loss rate), avg loss 1R (due to strict stops). Expectancy = 0.45×2.2R - 0.55×1R = 0.99R - 0.55R = 0.44R. This means each trade averages 0.44R profit. If per-trade risk $200, average profit $88 per trade, 100 trades earn $8,800. Acceptable standards: expectancy ≥0.3R is acceptable (long-term profitable), ≥0.5R is excellent, ≥1R is top-tier (very few strategies achieve this). Negative expectancy means losing strategy, must improve. Tip: expectancy calculation needs at least 50-100 trade data, too small sample inaccurate.

Recommend dynamically adjust by market structure, but set minimum R:R standard. Two method comparison: Fixed R:R (like always 1:2): Pros: simple, consistent, easy to backtest; Cons: may exit too early in strong trends, also target too large in ranging markets hard to achieve. Dynamic R:R (based on technical levels): Pros: profit target at key resistance/support, better fits market structure, improves achievement rate; Cons: inconsistent R:R, some trades may only be 1:1.2. Best practice: 1) Set minimum R:R requirement (like 1:1.5), below this ratio don't enter; 2) Profit target prioritize technical levels (previous high/low, Fibonacci, round numbers), but not exceed 3-5x R:R (too large hard to achieve); 3) Partial profit taking: 50% position close at 1:2, remaining 50% at 2:3 or trailing stop; 4) Record data: track actual achievement rate of different R:R settings, optimize strategy. Example: if your 1:3 target achievement rate only 20%, but 1:2 achievement rate 55%, then 1:2 may be better.

Prioritize optimizing entry position, not simply increasing target or tightening stop. Common wrong approaches: 1) Tighten stop: from 40 points to 20 points, improve R:R, but stop too tight easily hit by normal volatility, win rate plummets; 2) Increase target: from 60 points to 120 points, improve R:R, but target too large hard to achieve, actual profit actually decreases. Correct optimization methods: 1) Improve entry timing: wait for better entry (like breakout then retest confirmation), can use smaller stop to reach same target, naturally improve R:R; 2) Choose high volatility periods: trade during European-US overlap, trending moves easier to achieve large targets; 3) Trade with trend: only trade trend direction, profit target easier to achieve; 4) Use trailing stops: initial R:R may be 1:2, but through trailing stop ultimately achieve 1:3 or even 1:5; 5) Avoid low-quality trades: raise entry standards, only take high-probability trades, naturally improve win rate and R:R. Example: rather than enter in ranging area (30 point stop, 60 point target, R:R 1:2, 30% win rate), better wait for breakout confirmation (20 point stop, 60 point target, R:R 1:3, 50% win rate).

Different styles correspond to different optimal R:R, cannot generalize. Recommended settings: Scalping (M1-M5, hold <30 min): R:R 1:0.8-1:1.5, win rate need ≥60%. Reason: quick in-out, high fee cost, market noise large, hard to achieve large targets. Strategy: high frequency trading, small profits quick turnover. Intraday short-term (M15-H1, hold <4 hours): R:R 1:1.5-1:2.5, win rate ≥45%. Reason: sufficient time to achieve 2-3x targets, but no overnight holding, avoid gap risk. Strategy: capture intraday swings, combine European-US volatility. Intraday swing (H1-H4, hold <24 hours): R:R 1:2-1:3, win rate ≥40%. Reason: follow trends, large profit space, can pursue higher rewards. Strategy: trend following + key level breakouts. Multi-day swing (H4-D1, hold days): R:R 1:3-1:5, win rate ≥35%. Reason: capture large timeframe trends, single trade profit substantial, can tolerate lower win rate. Strategy: trend following + trailing stops. Key: choose R:R based on your holding time and trade frequency, don't pursue 1:5 targets on M5 chart, also don't only pursue 1:1 on D1 chart.