Risk & safety
What is a risk to reward ratio?
Risk to reward compares what you lose if wrong to what you gain if right. Its real use is that it fixes the win rate you need to break even: at 1:2 you need to be right about 33 percent of the time, at 1:3 about 25 percent. Judging a strategy without both numbers is judging half of it.
The break-even table
- 1:1 needs better than 50 percent.
- 1:2 needs better than 33 percent.
- 1:3 needs better than 25 percent.
- 1:5 needs better than 17 percent.
This is why a 25 percent win rate can be an excellent strategy and a 70 percent win rate can be a losing one. Win rate alone is not information.
Applying it to memecoins
The distribution here is extreme: most positions go to nearly nothing and a small number return several times the entry. That is a naturally high risk-to-reward profile with a naturally low win rate, and it only works if you actually hold the winners long enough to be large. Cutting winners at plus 20 percent while letting losers run to minus 80 percent inverts the ratio the strategy depends on.
Set both before entering
Decide the stop and the target before the position exists. Deciding a stop while holding a losing position is not a decision, it is a negotiation, and it has a known outcome.
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