Risk-to-Reward Ratio: How It Is Calculated and What It Means
Risk-to-reward ratio explained: how it is calculated from the stop and the target, why a high ratio can still lose money, and the one table that shows the win rate each ratio needs to break even.
The risk-to-reward ratio compares how much a trade can lose, if it reaches the stop-loss, with how much it can gain, if it reaches the take-profit. A trade risking 30 pips to gain 60 has a ratio of 1 : 2. On its own the number says nothing about whether the trade is worth taking; combined with how often the target is reached, it says everything.
Key Takeaways
- Ratio = distance to target ÷ distance to stop. Both measured from the entry.
- A high ratio is not a good trade. A 1 : 3 trade that hits the stop 80% of the time loses money.
- Every ratio has a break-even win rate. Below it, the approach loses; above it, it gains.
- The ratio is set before the trade. The win rate is only known after many.
How It Is Calculated
Long EURUSD at 1.08500, stop-loss at 1.08200, take-profit at 1.09100.
| Distance | On 0.10 lot | |
| Risk (to stop) | 30 pips | $30 |
| Reward (to target) | 60 pips | $60 |
| Ratio | 1 : 2 |
The ratio is a property of where the orders are placed. It does not change with position size — 1.00 lot risks $300 to gain $600, still 1 : 2. What changes with size is the money; see position sizing.
Why the Ratio Alone Is Not Enough
Suppose you take 100 trades at 1 : 2, risking $30 to gain $60 each time. Whether you end up ahead depends entirely on how many reach the target.
| Win rate | Wins × $60 | Losses × $30 | Net over 100 trades |
| 25% | $1,500 | $2,250 | −$750 |
| 33.3% | $2,000 | $2,000 | $0 |
| 40% | $2,400 | $1,800 | +$600 |
| 50% | $3,000 | $1,500 | +$1,500 |
At 1 : 2, the break-even win rate is one in three. A trader who hits the target only a quarter of the time is losing steadily despite a "good" ratio.
The Break-Even Table
For a ratio of 1 : R, the win rate needed to break even (before costs) is 1 ÷ (1 + R).
| Ratio | Break-even win rate |
| 1 : 0.5 | 66.7% |
| 1 : 1 | 50% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25% |
| 1 : 5 | 16.7% |
Read it both ways. A high ratio buys tolerance for a low win rate. A high win rate buys tolerance for a low ratio. Neither number is good or bad until it is read against the other. Costs — the spread on every trade, swap on held ones — push the real break-even slightly higher than the table.
Expectancy
The two numbers combine into one: the average result per trade.
Expectancy = (win rate × average win) − (loss rate × average loss)
At 40% wins, $60 average win, $30 average loss: (0.4 × 60) − (0.6 × 30) = 24 − 18 = +$6 per trade. That is what the approach earns on average, per trade, over many trades. A positive expectancy is the only thing a trading approach can offer; the ratio and the win rate are its two components.
The Trade-Off Nobody Escapes
Widening the target raises the ratio and lowers the win rate: a target further away is reached less often. Tightening the stop raises the ratio and also lowers the win rate: a closer stop is hit more often by noise. The ratio cannot be improved for free by moving orders around. It can only be traded against the win rate, and the only way to learn your win rate is to record trades — see how to keep a trading journal.
Risks Related to the Ratio
- Chasing a high ratio by placing targets the market rarely reaches.
- Tightening the stop to improve the ratio until it sits inside normal fluctuation.
- Judging a single trade by its ratio. One trade has an outcome; the ratio is a property of a series.
- Ignoring costs. Spread and swap are paid on every trade and shift the break-even.
What is a good risk-to-reward ratio?
There is no universal answer. 1 : 2 is common because it tolerates a win rate as low as a third, but a 1 : 1 approach with a 60% win rate is more profitable than a 1 : 3 approach with a 20% one.
Does the ratio change with position size?
No. It is set by the distances to the stop and the target. Size changes the money at risk, not the ratio.
How do I know my win rate?
By recording every trade and its outcome over a meaningful sample. Fewer than a few dozen trades tells you little.
Can a trade with a 1 : 1 ratio be worth taking?
Yes, if the target is reached more than half the time after costs.
Is risk-to-reward the same as expectancy?
No. Expectancy combines the ratio with the win rate into an average result per trade. The ratio is one input.
Related Terms
Stop-loss vs take-profit · Stop-loss orders · Position sizing · Spread · Drawdown
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