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Risk-reward ratio

Risk/Reward Ratio (R:R)

Risk management

Definition

The ratio between what a trade risks until the drawdown and what it can earn until the target. A ratio of 1:2 means that for every dollar at risk, the target is two dollars. The ratio alone doesn't say much: it is read together with the success rate.

Detailed explanation

A trader with a 1:2 ratio can be profitable even when they are right in only 40% of trades, and a trader with 1:0.5 needs to succeed in more than two-thirds of trades just to break even. This is why strategies with small targets and wide drawdowns look good for two weeks and then break an account. In the evaluation, there's another layer: the consistency rule. A distant target achieved in one huge trade can create a day that exceeds the rule, so the ratio is also checked against the daily profit that fits consistency.

An example from the prop world

A 10-point drawdown and a 20-point target in MES: a risk of $50 per contract versus a potential profit of $100, a ratio of 1:2. In ten trades with 4 successes and 6 losses, the result is $400 minus $300, a profit of $100 per contract before commissions.

סטופ לוס

An exit order that closes a losing trade at a predetermined level. In a prop account, a stop is not just good risk management: it's what separates a bad trade from crossing the drawdown threshold and failing the account.

Position size

The decision of how many contracts to open in a trade. It's calculated from the end to the beginning: how much you are allowed to lose per trade, divided by the loss of one contract up to the drawdown. In a prop account, this is the most important decision, because it determines how many mistakes the account can absorb before the threshold.

Consistency rule

A restriction applied at prop firms (both in the evaluation phases and in funded accounts) to make sure the trader operates systematically and steadily rather than relying on luck or aggressive gambling. The rule usually requires that the best trading day's profit not exceed a set percentage of total profit (or sets limits on position size), ensuring the trading account is built on balanced performance over time and not on a one-time “big hit”.

Profit target

The profit you need to build up in the evaluation to move to a funded account, without crossing the drawdown threshold and without breaking any other rule.

End-of-day (EOD) trailing drawdown

End-of-day drawdown (EOD Drawdown) is a trailing maximum loss limit rule in which the loss threshold moves up only once a day, based on the closing balance. At most firms, however, the threshold itself is enforced in real time, so touching it during the trading day fails the account.

Intraday trailing drawdown

This is a risk management limit calculated continuously in real time throughout the trading day. It tracks the account's peak balance (including realized profits and unrealized profits from open positions), so the loss threshold always rises together with the peak balance while keeping a fixed distance, but never goes down; crossing this threshold at any moment (even for a single second) causes immediate failure or closure of the account.