To understand the risk reward ratio requires some knowledge of ratios in general. A ratio is a quantitative relationship between two numbers. It shows how many times one value is contained within another. For instance a ratio of 1:3 means that 1 is contained 3 times within 3.

A favourable risk reward ratio in spread betting or any other kid of trading can mean the difference between success and failure. For instance if you have a risk reward ratio of 1:1 you would be only making your risk back (if you win) and therefore you would need far more winners than losers to make a profit. That’s fine if you can predict the markets. The fact is no one can. Therefore you are better of aiming for a more favourable risk reward ratio.

Some people suggest 1:2 or 1:3 risk reward ratio. These are better ratios to aim for as a risk reward ratio of 1:3 means you can be wrong 70% of the time and still make a profit.

The following example assumes a risk of 10 to a reward of 30. Therefore a 1:3 risk reward ratio.