Hey hey, what’s up my friend!

So…

You’ve been told that your winners must be bigger than your losers. So you aim for a 1-to-2 risk-reward.

Risk a dollar to make two dollars.

Sensible. Logical. Textbook stuff.

Except…

You lose so often that even when a target gets hit, it barely covers the trail of small losses behind it.

So you think to yourself…

"Let me lower the bar. 1-to-1 risk reward. More wins. Problem solved!"

Your win rate climbs.

Your account is still bleeding.

Fine.

So you lower it again.

Now you're risking a dollar to make fifty cents.

Winning nearly every trade. Feeling like an absolute genius. You're one step away from opening a trading Instagram account.

Then…

One loss shows up. And wipes out everything.

Every. Single. Win. Gone.

You stare at your screen and think…

"WTF is happening?"

Here's what's happening…

Your risk-to-reward ratio is not what makes you money.

Your edge is.

An edge is simply defined as…

E = (Win Rate × Average Gain) − (Loss Rate × Average Loss)

If that number is positive, you make money over time. If it's negative, you lose. That's it.

So stop looking for the optimal risk-to-reward ratio because it doesn’t exist.

Start looking for a strategy that has an edge in the markets.

Get that one right, and your risk-to-reward will take care of itself.

Cheers,

Rayner “trades-with-an-edge” Teo

P.S. If you’re looking for trading strategies that have an edge, then check this out.