Every trade is a bet, and risk/reward analysis makes sure the odds are in your favor before you put money on the table. The risk/reward ratio (R:R) compares how much you could lose versus how much you could gain. Risking $100 to potentially make $300 is a 1:3 R:R ratio. The golden rule most professionals follow: never take a trade with less than 1:2 R:R. If your stop loss is $1 from entry, your target needs to be at least $2 away. This single discipline separates profitable traders from those who slowly bleed out.

The math is powerful. If you demand 1:2 R:R on every trade, you only need to be right 34% of the time to break even. You can be WRONG on two out of every three trades and still not lose money. At a 40% win rate with 1:2 R:R, you're solidly profitable. Most struggling traders have the opposite problem — they risk $3 to make $1, needing to be right 75% of the time just to break even. Nobody is right 75% consistently. Fix your R:R and the math does the heavy lifting.

Calculating R:R is straightforward. Identify three levels before entering any trade: entry price, stop loss (where you're wrong), and profit target (where you take the win). Subtract stop from entry to get risk. Subtract entry from target to get reward. Divide reward by risk. Entry at $50, stop at $48, target at $56: risk is $2, reward is $6, R:R is 1:3. If the R:R doesn't meet your minimum threshold, skip the trade. Not every setup deserves your capital.

The game-changer is combining R:R with your actual win rate. Track every trade for at least 50 trades and calculate your win percentage. Then: (Win Rate x Average Win) minus (Loss Rate x Average Loss). If positive, you have an edge — positive expectancy. If negative, you're donating money to the market. The best traders aren't right more often — they just make way more when they're right than they lose when they're wrong.