Risk-reward ratio
The risk-reward ratio is the size of a trade's potential reward expressed against the size of the risk taken to earn it.
It is read as risk to reward, so a 1:2 ratio risks one unit to make two: a stop 30 pips away and a target 60 pips away. The ratio fixes the win rate a strategy needs to break even, and the larger the reward relative to the risk, the lower the win rate required to come out ahead.
This page covers the mechanic; it is not trading advice.
What the ratio is, and the win rate it demands
The risk-reward ratio comes straight from a trade's two distances: from entry to the Stop-loss, and from entry to the profit target. A long EUR/USD entry at 1.0850 with a stop at 1.0820 and a target at 1.0910 risks 30 pips to make 60, a 1:2 ratio. The pip values cancel because both legs are the same position size, so the ratio is the two distances compared.
The ratio matters because it sets the break-even Win rate. At 1:1 a trade makes what it risks, so the strategy breaks even at a 50% win rate. At 1:2 each win pays for two losses, so the break-even win rate drops to one in three. At 1:3 it drops to one in four. A higher reward relative to risk buys a lower required win rate, which is why a strategy can lose more often than it wins and still be profitable.
The common error is treating a high ratio as automatically better. A 1:5 setup has a low break-even win rate on paper, but if the 5-unit target sits so far away that price rarely reaches it, the real win rate falls below the break-even line and the strategy loses. The ratio and the win rate are a pair: neither number means anything without the other, and a wide target that never fills is worse than a modest one that does.
Calculating the ratio and the win rate it needs
The break-even win rate for any ratio is one divided by one plus the reward multiple. For a 1:R setup, break-even win rate = 1 ÷ (1 + R). At 1:2 that is 1 ÷ 3 = 33.33%. At 1:3 it is 1 ÷ 4 = 25.00%. Above that win rate the strategy is profitable; below it, the ratio cannot save it.
Costs move the line. The spread and any commission are paid on every trade regardless of outcome, and Slippage usually adds to them, so the real break-even win rate sits above the theoretical one. With a stop of S pips, a target of T pips and a cost of c pips per trade, break-even = (S + c) ÷ (S + T). With an assumed 1.0-pip spread and distances measured on mid-prices, a 1:2 strategy that breaks even at 33.33% before costs needs 35.00% with a 20-pip stop and a 40-pip target, and 36.67% with a 10-pip stop and a 20-pip target: the same cost weighs more on a smaller stop.
Reward-to-risk and drawdown are the same decision
The ratio also shapes the equity curve. A high reward-to-risk strategy produces profitable trades less often, so it strings together more loss-making trades between them, which deepens the Drawdown along the way even when the strategy is profitable overall. A lower ratio with a higher win rate produces a smoother curve. Choosing the ratio is therefore also choosing how much drawdown to sit through, which is why position size and the ratio are set together, not separately.
Expectancy: the number that ties them together
Win rate and reward-to-risk combine into Expectancy, the average result per trade. Expectancy = (win rate × average win) − (loss rate × average loss). A strategy with a 40% win rate at 1:2, risking $100 to make $200, has an expectancy of (0.40 × $200) − (0.60 × $100) = $80 − $60 = $20 per trade. Positive expectancy means the strategy makes money over a large sample, even though it loses 60% of its trades.
Expectancy is why the ratio and the win rate cannot be judged apart. The same 40% win rate at 1:1 gives (0.40 × $100) − (0.60 × $100) = −$20 per trade, a losing strategy. Raising the reward relative to the risk turned a loser into a winner without changing how often it won. The lever a trader most controls is often the ratio, through where the stop and target sit, more than the win rate, which is largely a property of the edge.
Related terms
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Common questions
What does a 1:2 risk-reward ratio mean?
It means the trade risks one unit to make two: the profit target is twice as far from the entry as the stop-loss. A 30-pip stop paired with a 60-pip target is a 1:2 ratio. Because each win covers two losses, a 1:2 strategy breaks even at a one-in-three win rate before costs, so it can lose two trades for every winner and still hold its ground.
Is a higher risk-reward ratio always better?
No. A higher ratio lowers the win rate needed to break even, but only if the wider target is reached often enough. Targets set far from entry fill less frequently, so a 1:5 setup with a target price rarely hit can have a real win rate below its break-even line and lose money. The ratio has to be judged together with how often the target is actually reached, not on its own.
How do trading costs change the break-even win rate?
They raise it. The spread and any commission are deducted on every trade, whether it is profitable or loss-making, so they shrink each profitable trade and enlarge each loss-making one; slippage usually adds to that. A 1:2 strategy with a theoretical 33.33% break-even win rate needs 35.00% after an assumed 1.0-pip spread on a 20-pip stop and 40-pip target, and 36.67% on a 10-pip stop and 20-pip target, because break-even after costs is (stop + cost) ÷ (stop + target).
What is a good risk-reward ratio?
There is no single correct ratio; the right one is whatever produces positive expectancy at the strategy's real win rate. A high-win-rate scalping approach can be profitable at 1:1 or below, while a trend-following approach that wins a third of the time needs 1:2 or wider to break even. The ratio is matched to the win rate the edge actually delivers, verified over a large sample, rather than picked as a target in isolation.