Risk-Reward Ratio

How to calculate it

Measure the distance from entry to stop loss — that is one unit of risk, or 1R. Then measure the distance from entry to target. Divide the second by the first.

Entry at 100, stop at 96, target at 112: risk is 4, reward is 12, so the ratio is 3:1. The ratio is about distances on the chart, not about dollars, which means it is the same whatever your account size.

The break-even win rate for each ratio

Every ratio implies a minimum win rate. Below it you lose money, above it you make money, before costs.

• 1:1 needs more than 50% of trades to win.
• 1.5:1 needs more than 40%.
• 2:1 needs more than 33%.
• 3:1 needs more than 25%.
• 5:1 needs more than 17%.

Why higher is not automatically better

Distant targets are hit less often. Pushing a target from 2R to 5R usually drops the win rate more than the extra reward compensates for, and it lengthens losing streaks — which matters enormously if you trade under a drawdown limit.

The right ratio is the one your strategy actually achieves, measured over a real sample of trades. A trend-following approach may live comfortably at 3:1 with a 35% win rate. A mean-reversion approach may run at 1:1 with a 60% win rate. Both work; copying the other one's ratio breaks both.

Using it properly

• Set the stop where the chart invalidates the idea. That defines 1R — never shrink it to improve the ratio on paper.
• Set the target at a level price can realistically reach: the next structure, range boundary or imbalance.
• If the resulting ratio is below your minimum, skip the trade rather than moving the stop closer.
• Track the realised ratio, not the planned one. Partial exits and early closes change the real number.
• Include costs. Commission and spread reduce every winner and enlarge every loser.

Common mistakes

• Tightening the stop to manufacture a better ratio, which just raises the chance of being stopped out early.
• Setting targets at levels price has no structural reason to reach.
• Comparing planned ratios to actual results and wondering why the numbers do not match — early exits change everything.
• Chasing very high ratios without checking what they do to the win rate and the length of losing streaks.
• Leaving fees and slippage out of the calculation, which quietly turns a marginal edge negative.

Put it into practice

Frequently asked questions

What is a good risk-reward ratio?

There is no universal answer. Anything above 1:1 is workable if your win rate supports it. Most systematic approaches aim for 1.5:1 to 3:1 because those ratios pair with achievable win rates.

How do I calculate risk-reward quickly?

Reward distance divided by risk distance. The risk/reward calculator does it along with the break-even win rate each ratio requires.

Can a 1:1 ratio be profitable?

Yes, with a win rate comfortably above 50% after costs. Many short-term strategies operate exactly this way.

Does risk-reward matter more than win rate?

Neither matters alone. Expectancy combines them into one number, and expectancy is what determines whether repeating a strategy makes money.

Related terms