What does 1.5 risk-reward ratio mean?

A 1.5 risk-reward ratio refers to the relationship between the potential profit and potential loss of a trade in trading. In this ratio, for every unit of risk you're willing to take (potential loss), you aim to make 1.5 units of profit. This means that your potential reward is 1.5 times the size of your potential loss.

Here's how a 1.5 risk-reward ratio works:

Risk (R): The amount of money you're willing to risk on a trade, often determined by your stop-loss level (the price at which you'll exit the trade if it moves against you).
Reward (1.5R): The potential profit you aim to make from the trade. In a 1.5 risk-reward ratio, the potential profit is 1.5 times the amount of your risk.

For example, if you're trading a currency pair and you set a stop-loss that would result in a potential loss of $100 if the trade goes against you, in a 1.5 risk-reward ratio, your potential profit would be 1.5 times your risk, which is $150.

Mathematically:

Risk (R) = $100
Reward (1.5R) = 1.5 R = 1.5 $100 = $150

In this case, your potential profit of $150 would be 1.5 times the size of your potential loss of $100, resulting in a 1.5 risk-reward ratio.

Using a 1.5 risk-reward ratio can offer several advantages:

Balanced Approach: A 1.5 risk-reward ratio ensures that your potential reward is greater than your potential risk, promoting a balanced approach to trading.
Potential for Consistency: Even if you have a relatively moderate success rate in your trades, having a few winning trades can help offset any losses due to the favorable reward-to-risk ratio.
Psychological Benefits: Knowing that your potential reward is 1.5 times your potential loss can boost your confidence, encourage discipline, and help you adhere to your trading plan.
Risk Management: This ratio is part of a risk management strategy that guides you in setting consistent parameters for position sizing, stop-loss, and take-profit levels.

It's important to remember that the choice of risk-reward ratio depends on your trading strategy, style, and risk tolerance. While a 1.5 risk-reward ratio is a popular choice, you should adapt your ratio based on your individual circumstances and align it with your trading goals and preferences.