Hey hey: what's up my friends, so in today's episode right i want to share with you the ugly truth about risk to reward ratio, because this is something that i'm sure you've seen a lot many times right away. You know traders say you need a minimum of a one to two risk: reward ratio to be a profitable trader or one to five. That's even better. You know - and this is really to me right - that's trash right, and why is that right? Because here's the deal right, your risk to reward ratio is somewhat of a a lie right, it's misguided and let me explain why so, let's say, for example, you have a trading strategy right this trading strategy.

You aim of an aim for a minimum of a one to ten risk reward ratio. Many traders wow one to ten risk reward ratio right now that must be held for a good trading strategy, but i forgot to mention that this strategy only wins. Five percent of the time, meaning 95 of the time when you trade this strategy, you lose. So let's do some simple math right.

Let's say you do 100 trades and you risk one dollar on each trade. So let's say you: you win five percent of the time and each time you get a one to ten race reward ratio. So each time you win, you win ten dollars and out of 100 trades, you win five times. So that's a total gain of 50.

Now what about your losers? So again, let's say when you lose, you lose only a dollar, but because you lose 95 percent of the time. Let's say you have 95 losers right out of this hundred trades in total, your losses is negative. 95. So if you take positive 50 minus negative 95 dollars, what is your outcome? Well? Clearly, you're still down right, you are, in the rate negative 45 dollars.

Okay, and on the other hand, let's say you know you have another trading strategy this time around your risk to reward is, let's say you risk a dollar and only make 70 cents, not even a one-to-one risk reward ratio. However, your winning rate is in realms of 70. So again, let's say you take 100 trades and you risk one dollar per trade. What's the outcome, so 70 cents multiplied by the 70 winning rate you get about 49, as your total profits.

As for losses, you lose 30 of the time. Each time you lose, you lose a dollar. So in total your losses is 30, so 49 minus thirty dollars. You still have a net gain of nineteen dollars, and this with is with a very poor risk to reward ratio of less than one to one.

So where am i getting it right with these examples, and it's very simple: is that your risk to reward ratio on its own? It's a line, it's meaningless, there's, no meaning to it. Risk to reward ratio only makes sense right when you know what is your winning rate, because when you combine these two together, your winning rate and you risk the reward ratio, that's where you know whether you have a positive expectancy right in trading. That's where you know whether in the long run, you'll make money or not okay, so so don't get too caught with risk to reward ratio. Don't think that you know the risk to reward ratio is kind of like your answer to everything, because it's not it's just one part of the equation.

So now the question is right since we're on the topic of risk to reward ratio. How do we use this? In our trading, so let me share with you a few tips all right. So when you measure your risk reward ratio, it's always measured in terms of potential. You can potentially risk, let's say five dollars to make ten dollars.

That's a risk to reward ratio of potentially uh risking one to make two right. It's always dealing in potential, never certainties all right, so so how you want to use this is that whenever you put on a trade right - and let's say you identify a risk to reward ratio of a potential, you know risking, potentially risking a dollar to make two Dollars right a potential one to two risk reward ratio on the trade. You want to ask yourself this very important question: how unlikely is that trade going to hit my target? How likely is that going to happen because you can have a one to two risk reward ratio, but if there's only a 10 chance of you know reaching your target, then that's not a trade that you want to take okay. So so that's how you use your risk to reward ratio.

Ask yourself: how likely is it going to reach my target? So there are three ways to find out number one is based on your stats, based on your journaling right to see historically every time you take this setup right. What is the winning rate right? If you know that you know your winning rate for this particular setup is 55 right and right now your potential risk to reward is one or two. Then that's a trade that you want to take consistently. Okay, so that's one way the other way to look at it is to look at the context of the market.

Let's say this is a trade that you know you could potentially make a one to two risk reward ratio. How likely is that going to reach your target? Let's say you know you don't have your stats with you, then you, you know, ask yourself, questions like you know, uh. What is the trend? Am i trading in the direction of the trend or against it? Because if you are again trading in the direction of the trend, then there's a higher chance that the market right will hit your target profit right and give you all right? And let you achieve that. One to two risk reward ratio.

At the same time, you also can also look at you know: uh price structure or rather obstacles in your trade. So let's say you buy at support right uh, you have a 100 pip, stop loss right and your target profit is 200 pips away. So you ask yourself: how likely is the price you know going to reach a target of 200 pips if that 200 pips away? You have to you know, break through two levels of resistance, you're trading against a downtrend. Then you can be sure right.

That's a trade that is unlikely gon na hit your target, not impossible, but unlikely right. So this is how you can use the price structure of the market, the market structure right to decide whether you know the risk to reward uh. Is you know something that you want to take, whether the trade you know risking a dollar to make two dollars right? What are the odds right of it? You know working out in your favor, so you can look at the statistics that you have based on your trade journaling or you can look at you know based on the market structure itself right and see uh. You know how much obstacles there is in your way right for before the price can reach your target.

So so, as mentioned right, let's do a quick recap: there is the reward ratio on its own. It's meaningless. You need to combine it with your winning rate right for it to actually make sense. Okay, uh second thing is that to find out, you know whether the potential risk to reward on the trade is worth it.

You want to ask yourself right: how likely is for the market right to move in your favor? You can, you know, check based on your past statistics right through your trade journaling to see you know what are the odds of you know that set up working out based on the past and finally, you can also you look at the market structure itself right and To see right, whether the market has a good chance of you know reaching your target or not so clearly, if you're trading against the trend, you have a lot of obstacles to overcome right. That trade is unlikely to hit your risk to reward ratio, and this is why, right, you know, 1 to 10, 1 to 20 risk to reward ratio. It sounds you know attractive, but to get to that level right, you know how many resistance the price has to go through to reach that level and what are the odds of the price you know just breaking out of resistance and hitting your target immediately right. It's pretty much, you know low probability, odds, okay, so that's where i'm coming from so with that said, i wish you good luck and good trading.

I will talk to you soon. You.