I've been discussing trading with friends lately and realized that many people don't understand the concept of the risk-reward ratio. Actually, this is the key factor that determines whether you can make consistent profits.

Let's clarify what the risk-reward ratio is. Simply put, it's the ratio of your potential profit to your potential loss. Suppose your capital is $100, and you risk only 10% per trade, which is $10. The risk-reward ratio then indicates how much you stand to gain when you win versus how much you lose when you fail.

Let me do some calculations for you. If you make 10 trades, with only 1 winning trade and 9 losing trades, your win rate is 10%. If your risk-reward ratio is 1:1—that is, you make $10 when you win and lose $10 when you lose—then you end up winning once and losing nine times, losing a total of $90, and ultimately losing $80 overall. But if your risk-reward ratio improves to 1:2, the situation changes completely.

Here's an important point: your win rate can't be 10% or 100%. Even if you're just guessing—up or down—the win rate should be around 50%. Claiming a 100% win rate means you’re trading too infrequently, maybe only one or two trades a year, and your sample size is too small to be meaningful.

I've seen people say they have a 6-day winning streak with 100% success, but does that really reflect their skill? Not necessarily. If you only make 4 trades in a month, your win rate will look very high, but that doesn't represent your true ability. Conversely, some traders make dozens or even hundreds of trades daily, jumping in on signals impulsively, and their win rate is likely to be quite low.

Here's the core: when your win rate is 50%, but your risk-reward ratio is 1:1, you break even. If your risk-reward ratio increases to 1:1.5, you only need a 40% win rate to be profitable. If you can achieve a 1:2 ratio, then a 40% win rate is enough. For a 1:2.5 ratio, only 30% wins are needed. The most impressive is a 1:5 ratio, where you only need a 20% win rate—better than flipping a coin.

Some say this is too idealistic, but it’s not. The key is to decide beforehand how much you're willing to lose. For example, risking $10, then look for opportunities where the market can give you $15 or $20 in profit. If it can, then the trade is worth taking. If not, skip it.

I once taught a student whose win rate was 71%, with a risk-reward ratio of 1:1.5. In the end, he neither gained nor lost money. Why? Because he was trading too often. Once he accumulated enough samples, his true win rate and risk-reward ratio revealed themselves. Many beginners fall into this trap—they think a high win rate means they can increase trading frequency and position size, but that often leads to bigger losses.

My advice is to record every trade you make. Over time, you'll see your real win rate and risk-reward ratio. Knowing these two metrics helps you understand why you're losing money and what types of trades you're best at. Some are good at range trading, some at trend following, some at rebounds. Find your rhythm, and your win rate and risk-reward ratio will become much clearer.

At the end of the day, the risk-reward ratio is just math. Once you understand this logic, you'll see why some traders can make steady profits while others keep losing. It’s not because they’re smarter, but because they truly understand the relationship between win rate and risk-reward ratio. Before your next trade, ask yourself: Is my risk-reward ratio reasonable? If it is, go ahead and trade. If not, wait. It’s that simple.