Reward-to-Risk

Key idea

Reward-to-risk compares the distance to a realistic target against the distance to technical invalidation. A setup with excellent pattern quality but a poor reward-to-risk ratio (e.g. target barely beyond entry, stop far away) is still a weak trade — the math has to work alongside the pattern.

How to apply it

• Identify technical invalidation first, then a realistic target based on structure (not a hopeful extension).
• Calculate the ratio: distance to target ÷ distance to invalidation.
• Set a minimum acceptable ratio (many traders use 1.5:1 or 2:1) and pass on setups that don't clear it.
• Re-evaluate reward-to-risk if price moves partway to target and a new, tighter invalidation becomes available.

Example

Entry at $100, technical invalidation at $97 (risk of $3), and the nearest realistic resistance/target at $103 (reward of $3) is only a 1:1 ratio — a technically valid setup that may still not be worth taking under a 2:1 minimum rule.

Checklist

• I calculated the ratio using a realistic target, not a hopeful one
• I have a minimum ratio threshold I actually enforce
• I passed on (or resized) setups that don't meet the threshold
• I re-evaluate the ratio if the trade partially plays out

Common mistakes

• Setting an unrealistic target just to make the ratio look acceptable
• Ignoring reward-to-risk on setups that otherwise look visually appealing
• Never revisiting the ratio as the trade develops
• Taking every setup regardless of the calculated ratio