What it is — Risk-Reward Ratio
Risk-reward ratio (R:R) divides the distance to your stop by the distance to your target. Stop 25 pips, target 50 pips → 1:2: you risk 1 unit to make 2. It is the cleanest expression of a trade’s mathematics — and the reason a trader can lose most of the time and still compound.
The formula that decides everything: expectancy = (win% × avg win) − (loss% × avg loss). At 1:2, a 40% win rate is profitable: (0.40×2) − (0.60×1) = +0.2R per trade. At 1:1 you would need >50% just to break even after costs.
Why it matters — Risk-Reward Ratio
- It frees you from needing to be right. The plan survives losing streaks that destroy 1:1 traders.
- It is chosen at entry. Stop and target define R:R before a single cent moves — see the Risk/Reward Calculator.
- It exposes bad targets. Chasing 1:5 trades that never reach target is as broken as taking every 1:1.
The breakeven win rate, worked out
Risk-reward sets the win rate you need to break even: 1/(1+RR). At 1:1 you must win half; at 1:2 (risk $10 to make $20) you break even at 33.3%; at 1:3, 25%. Now the hopeful scenario: win 40% of your trades at 1:2. Expectancy per trade = 0.4×$20 − 0.6×$10 = +$2 per $10 risked — a real edge from being right less than half the time. Flip it around: force 1:1 trades and even a 50% winner just treads water while spread grinds you down. This is why target placement is strategy, not decoration.
Why a good ratio can still lose money
Three quiet killers. Cut winners: closing at +$8 turns your 1:2 into 1:1.25 — your breakeven win rate just rose without telling you. Widen stops: “giving it room” doubles the risk leg and the ratio with it. Cherry-picked stats: a 1:5 plan that wins 12% of the time is a 30-loss streak waiting to test your soul — long before the average arrives, the account (or the trader) breaks. Log every trade in risk units and the truth of your ratio survives streaks; the 1% journal format thread shows one that does.
Frequently asked questions — Risk-Reward Ratio
What is a “good” risk-reward ratio?
Whatever your strategy’s win rate makes profitable. Practical bands: 1:2–1:3 suits 35–50% win-rate setups; scalps often run 1:1–1:1.5 with higher win rates.
What is a good risk-reward ratio?
One your win rate actually supports. 1:2 with a 40%+ win rate is a realistic, repeatable bar for beginners. Ratios above 1:3 look great on paper but demand the patience to let winners run untouched.
How do I calculate risk-reward before entering?
In pips: entry minus stop = risk leg; target minus entry = reward leg; divide. Entry 1.1229, stop 1.1204 (25 pips), target 1.1279 (50 pips) → 1:2. Decide it before entry — never after.
Does a wider stop ruin the ratio?
It changes it — that is the point. A wider stop needs a proportionally wider target to keep the same R:R, and your position size shrinks to hold the same dollar risk. All three numbers move together.
Related terms — Risk-Reward Ratio
Related tools — Risk-Reward Ratio
🧠 Test yourself: this term appears in the Glossary Quiz — 10 random questions, instant explanations, no sign-up.
Terms · Privacy · Editorial Policy · Affiliate Disclosure · Risk Disclaimer · Contact