{"term":{"slug":"risk-reward-ratio","term":"Risk-Reward Ratio","definition":"The relationship between the potential loss (risk) and potential gain (reward) on a trade, expressed as a ratio like 1:2 or 1:3. A 1:2 ratio means you risk $1 to potentially make $2.","extendedExplanation":"Risk-reward ratio is fundamental to profitable prop firm trading. With a 1:2 risk-reward ratio, you only need to win 34% of your trades to break even (ignoring commissions). With a 1:3 ratio, you only need 25% win rate.\n\nProp firm evaluations amplify the importance of risk-reward because the profit target is typically 2x the max drawdown. On FTMO $100K, you need $10,000 profit (10%) with only $10,000 max drawdown (10%). This 1:1 ratio between target and drawdown means you cannot afford a string of losses without good risk-reward on individual trades.\n\nMany prop firm traders aim for 1:2 or better risk-reward ratios. This means stop-losses are tighter than take-profit levels. The trade-off is that higher risk-reward ratios typically have lower win rates. The key is finding the combination of win rate and risk-reward that generates enough profit to hit the target before drawdown is exhausted.","exampleWithNumbers":"FTMO $100K evaluation, $10,000 profit target. You trade with 1:2 risk-reward, risking $500 per trade (0.5%) to make $1,000. With a 50% win rate: expected profit per trade = (0.5 * $1,000) - (0.5 * $500) = $250. You need 40 trades to hit the $10,000 target. Max losing streak before $5,000 daily limit (with $500 risk): 10 consecutive losses.","category":"risk","relatedTerms":["win-rate","stop-loss","take-profit","risk-per-trade","break-even-point"]},"_links":{"self":"https://runvigil.app/api/glossary/risk-reward-ratio","page":"https://runvigil.app/learn/risk-reward-ratio","allTerms":"https://runvigil.app/api/glossary","learn":"https://runvigil.app/learn"}}