Recently, I’ve been thinking about a question: why do some people always lose money when trading, while others can consistently make profits? The key might lie in the concept of the risk-reward ratio.

What exactly does the risk-reward ratio mean? Simply put, it’s the ratio between the amount of money you make and the amount you lose each time. But many people haven’t seriously calculated this. Let me give an example: suppose you have $100 in your wallet, and you only risk 10%, which is $10, on each trade.

If your risk-reward ratio is 1:1, meaning you make $10 when you win and lose $10 when you lose, then your win rate needs to reach 60% to actually make money. But if you can achieve a 1:1.5 ratio, you only need a 40% win rate. What does this mean? With a 1:2 risk-reward ratio, you only need a 40% win rate. With a 1:3 ratio, a 30% win rate is enough to make steady profits without losses. The most extreme is a 1:5 ratio, where a 20% win rate is sufficient—lower than flipping a coin.

Now, some might object, “Teacher, you’re speaking easily. How can I close a trade at a $10 loss every time, but make $15 or $20 when I win?” This involves a real-world issue. Many people are actually fooling themselves; they think that as long as they don’t realize a floating loss before closing, it’s not a real loss, and as long as they end up in profit, they’re making steady gains. But this idea only holds if your win rate is 100%, which is impossible.

I’ve seen a student with a 71% win rate—sounds high, right?—and a 1:1.5 risk-reward ratio. Yet, after ten days or so, they still neither gained nor lost. This is a typical beginner’s misconception. Some people trade for six days with a 100% win rate and think they’ve improved, but in reality, it’s just because they’re trading too few times. Over a longer period, say one week with only four trades, or a month with just four trades, the win rate appears high. But if you take this as truth, increase your trading frequency, and enlarge your position sizes, you’ll fall into the confidence trap.

Conversely, some people have very low win rates—they might make dozens or even hundreds of trades in a day, jumping in whenever they see a signal, unable to resist. In such cases, their win rate is definitely poor. Or someone might only make four trades a week and lose three, which usually indicates their judgment isn’t wrong, but they pick the wrong entry points, set their stop-loss too tight, and are afraid of losing money—too timid.

The core advice is simple: before entering a trade, decide how much you’re willing to lose, for example, $10, and then see if the market can give you a chance to make $15 or $20. If yes, then this trade is worth taking. If not, then skip it. Keep a long-term record of every trade, and you’ll see your true win rate and risk-reward ratio, and understand why you’ve been losing money all along.

Ultimately, the real meaning of the risk-reward ratio is to help you understand that it’s not just about having a high win rate to make money. Instead, it’s the combination of your win rate and risk-reward ratio that determines your profitability. A 50% win rate with a 1:1 ratio results in break-even. But if you can achieve a 1:2 ratio, a 40% win rate is enough. That’s the power of mathematics. Save this table, do the calculations yourself, and you’ll understand why I keep emphasizing how important the risk-reward ratio is.