Risk-reward ratio

The risk-reward ratio compares the distance from entry to stop-loss (the risk) with the distance from entry to take-profit (the potential reward). A trade risking 20 pips to target 40 pips has a ratio of 1:2. Many traders express it as a multiple of risk, "R": that trade aims for 2R.

Why it matters: break-even win rate

The ratio decides how often you need to be right just to break even, before costs:

Break-even win rate = risk divided by (risk + reward)

• 1:1 needs to win 50% of the time.
• 1:2 needs about 33.3%.
• 1:3 needs 25%.
• 2:1 (risking 2 to make 1) needs about 66.7%.

Example

Illustrative figures: over 10 trades, each risking 100 euros with a 1:2 ratio, you win 4 and lose 6. Wins: 4 times 200 = 800 euros. Losses: 6 times 100 = 600 euros. Net result: +200 euros before spreads, commission and swaps. With a 1:1 ratio and the same 40% win rate, the same 10 trades would lose 200 euros.

Common misconceptions

• A big ratio does not make a trade good. Targets far away are reached less often, so the win rate usually falls as the ratio rises. What counts is the combination, known as expectancy.
• The ratio on paper ignores spread, slippage and gaps, which hit short-term trades hardest.
• Moving the stop further away mid-trade to avoid a loss changes the ratio after the fact and is one of the most common ways small losses become large ones.

See our guide to risk-reward ratio for expectancy maths, and position sizing for turning risk into lot size.