Risk-Reward Ratio
The risk-reward ratio compares what you risk to what you target, and it decides whether a strategy survives its losing streaks.
The risk-reward ratio compares risk to target, e.g. 1:3 means risking 1 to make 3. It decides the win rate you need to profit, and must be evaluated together with that win rate.
The risk-reward ratio (RR) compares the distance to your stop-loss against the distance to your take-profit: risking 20 pips to make 60 is a 1:3 ratio. It determines how often a strategy must win to be profitable: at 1:3, a 30% win rate breaks even before costs; at 1:1, you need above 50%. Chasing high ratios without the market structure to support them produces few wins; low ratios with a poor win rate bleed slowly. The ratio and the win rate are a pair - never evaluate one without the other.
How It Works
- Ratio = target distance divided by stop distance
- At 1:3, 30% winners break even before costs
- Entry, stop and target define the ratio before the trade
Trading Tips
Set the ratio from market structure, not a preferred number
High ratios are worthless if price never reaches the target
Add costs to the math: spread and commission shift the breakeven win rate
Risk-Reward Ratio Example
Say you risk 20 pips to make 60, a 1:3 ratio, and win 4 of 10 trades. Four wins bank 240 pips against 120 lost: net 120 pips at a 40% win rate most beginners would call failure. The ratio did the work, not the accuracy.
How Traders Use Risk-Reward Ratio
Fix a minimum ratio before entry, usually 1:2 or better, and skip anything thinner no matter how certain it feels. Track expectancy monthly: ratio times win rate minus costs is the only scoreboard.
Related Terms
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