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The risk-reward ratio is useless without probability
A 3:1 risk-reward ratio sounds attractive. Risk £100 to make £300, and the trade looks sensible on paper. But that number means very little if you do not understand the probability behind the setup. A trade can offer a huge reward compared with the risk, yet still be a poor decision if it almost never works.
Why risk-reward can be misleading
Many traders are taught to look for trades where the potential upside is larger than the downside. That is useful, but it can also become dangerous when it is used in isolation.
A trade with a 5:1 reward-to-risk ratio might sound better than a trade with…
The skinny
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