What is the risk-reward ratio?

The risk-reward ratio (R:R) compares how much you stand to lose on a trade versus how much you stand to gain. It's written as reward : risk — not the other way around.

The formula:

• Risk = entry price − stop-loss price (what you'd lose if wrong)
• Reward = take-profit price − entry price (what you'd gain if right)
• R:R ratio = reward ÷ risk

Example: You buy at $100, set a stop-loss at $95 (risk $5) and a take-profit at $115 (reward $15). That's a 3:1 risk-reward ratio — you risk $1 to make $3.

Why it matters:

• A favorable ratio (2:1, 3:1 or better) means you don't need to win most trades to be profitable.
• At 3:1, you only need to be right ~25% of the time to break even. At 1:1, you need to be right over 50%.

Key nuance — the math behind it: Profitability isn't just about the ratio; it's ratio × win rate. Many traders lose money not because their ratio is bad, but because they take losses too big relative to wins, or their win rate is too low for the ratio they use.

Crypto-specific caveat: R:R is a planning tool, not a guarantee. In crypto, slippage on low-liquidity tokens and gaps between candles can mean your stop-loss fills worse than your planned level — so a "3:1" on paper can end up closer to 2:1 in reality, especially on meme coins or thin DEX pairs.

Want me to look at a specific coin's current price and recent volatility so you can gauge where a sensible stop-loss / take-profit zone might sit?