The risk-reward ratio in trading
The risk-reward ratio compares what you risk with what you can make. Together with your win rate, it determines whether a strategy can be profitable.
How to calculate it
Ratio = distance to take profit ÷ distance to stop loss. If you risk 20 pips to make 40, your ratio is 1:2 (or 2R).
The win rate you need
- 1:1 → more than 50% winners to make money.
- 1:2 → more than 33%.
- 1:3 → more than 25%.
Expectancy: the number that matters
Expectancy = (win rate × average win) − (loss rate × average loss), measured in R. A 40% win rate at 1:2 gives 0.4 × 2 − 0.6 × 1 = +0.2R per trade: profitable in the long run even though you lose more often than you win.
Don't chase impossible ratios
A 1:5 target on the far side of strong resistance rarely gets hit. The target must make sense given the structure of the chart.
Frequently asked questions
What is a good risk-reward ratio?
For most strategies, between 1:1.5 and 1:3.
Can you be profitable with less than 50% winners?
Yes, as long as your average ratio is above 1:1 and you stay disciplined.