What risk reward ratio means
Risk reward ratio compares how much you are willing to lose with how much you can reasonably make. If you risk 100 and your target offers 200, the trade has a 1:2 risk reward profile, often written as 2R.
The important word is reasonable. A target should be based on structure, liquidity, resistance, support, previous highs or lows, or your tested strategy. A random far target may make the ratio look good, but it does not make the trade better.
The simple formula
For a long trade, risk is entry minus stop loss. Reward is target minus entry. For a short trade, risk is stop loss minus entry, and reward is entry minus target.
Example: you enter long at 100, stop loss is 95, and target is 112. Risk is 5 points. Reward is 12 points. The risk reward ratio is 12 divided by 5, which equals 2.4R.
How to use it before clicking buy or sell
Before entering, write down entry, stop, target, and reason for the setup. If the ratio is weak, you have three choices: skip the trade, wait for a better entry, or adjust the plan only if the chart structure supports it.
A trader who journals this habit will often notice patterns. Some setups may work only when the reward is above 2R. Some scalps may need high win rate and smaller R. The journal makes this visible.
Common mistakes traders make
The first mistake is moving the target only to make the ratio look attractive. The second is placing the stop too tight so the trade becomes easy to stop out. The third is entering late and still pretending the original R:R exists.
The clean habit is simple: calculate the ratio at the real entry price, with the real stop, before the trade is taken. Then save the screenshot and review whether the decision matched the plan.