Risk/reward ratio compares what you stand to lose if wrong against what you stand to gain if right. CFI's master-trader checklist: only take trades where being right pays much more than being wrong costs. Reject setups where a $50 loss is possible but $10 is the realistic upside — the math is hostile even with good analysis.
Operational rules
- Use stop-loss orders; never let one trade threaten the account (position-sizing).
- Skip trades without a favorable, low-risk entry — a valid reversal with bad entry is still a pass.
- Positive risk/reward is necessary, not sufficient; you still need edge and process review.
Alexander Elder's line in the source: "The goal of a successful trader is to make the best trades. Money is secondary." Focus on setup quality; P&L follows distribution of outcomes.
Breakeven Win Rate
R is the reward-to-risk multiple. Given R, the minimum win rate to break even is:
| R multiple | Min win rate to break even |
|---|---|
| 1R | 50% |
| 2R | 33% |
| 4R | 20% |
| 9R | 10% |
At 4R, you can be wrong 80% of the time and not lose money. This is the structural tradeoff: higher reward targets lower the win rate required to stay profitable. The actual win rate of your system, combined with the R multiple, determines expectancy.
Sources
- the-complete-guide-to-trading
- the-math-of-winning-in-trading — breakeven win rate formula; system design tradeoff
- position-sizing
- trading-psychology
- art-of-trading-with-light-su-zhu-and-hasu — invalidation and nullification discipline