I want to share with everyone a concept in trading that is often overlooked—the risk-reward ratio.

First, a quick explanation: many people confuse the risk-reward ratio with the percentage increase. The risk-reward ratio is not about how much you can earn, but about how much risk you are willing to take to earn that money. In other words, it’s about whether you dare to lose.

The core formula is simple:
Risk-Reward Ratio = Potential Profit ÷ Potential Loss
which is (Take Profit Price − Entry Price) ÷ (Entry Price − Stop Loss Price)

Here are three key points to remember:
1. The denominator is always the stop loss price.
2. It has nothing to do with leverage (leverage only amplifies the results, it doesn’t change the framework).
3. This calculation uses absolute values, not percentages.

Let’s try a concrete example:
You open a position at $100, set a stop loss at $90, and a take profit at $120.

The risk is $100 minus $90, which is $10; the reward is $120 minus $100, which is $20.
Risk-Reward Ratio = 20 ÷ 10 = 2, which is a 1:2 ratio.
Simply put— for every $1 you risk, your target is to make $2.

The most common pitfall is when someone says the price increased by 2%, then concludes a risk-reward ratio of 1:2. That’s completely different. The percentage increase is just the result; the risk-reward ratio is about the structure. When the structure is right, there’s a real chance to make money in the long run.

Why is the risk-reward ratio more important than the win rate? This example makes it clear:

Trader A: Win rate is only 40%, but the risk-reward ratio is 1:3, so they still make money in the long run.
Trader B: Win rate is as high as 70%, but the risk-reward ratio is only 1:0.8, and they still end up losing.

See? The risk-reward ratio determines whether you can withstand a series of mistakes. It’s not about earning more, but about ensuring you survive when you make errors. This is especially important for highly volatile assets like Bitcoin and Ethereum.