Risk-to-reward
Distance to target versus distance to stop
What it is
The ratio between the distance from entry to target and from entry to invalidation. 1:3 means risking one unit to make three.
What it may suggest
A higher ratio lowers the win rate you need. At 1:1 you have to be right more than half the time. At 1:3 you only have to be right more than a quarter of the time. That is the whole argument for asymmetry.
Where it fails
Only meaningful if the target is realistic. A 1:10 measured to a level price has not reached in a year is arithmetic, not a plan.
Also called risk reward, r:r, rr ratio, r multiple.
More concepts
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