What Is the Risk/Reward Ratio?
The risk-to-reward ratio (R:R) compares how much you stand to lose on a trade versus how much you stand to gain. A ratio of 1:3 means you're risking 1 unit to potentially gain 3 units.
Why R:R Is the Most Important Metric
Here's the key insight: you don't need to win most of your trades to be profitable. The R:R ratio determines the minimum win rate you need:
| R:R Ratio | Breakeven Win Rate | Implication |
|---|---|---|
| 1:1 | 50% | Need to win half your trades |
| 1:2 | 33.3% | Only need 1 in 3 trades to win |
| 1:3 | 25% | Only need 1 in 4 trades to win |
| 1:5 | 16.7% | Only need 1 in 6 trades to win |
This is why professional traders focus on R:R rather than win rate. A strategy with a 30% win rate and 1:3 R:R is highly profitable.
How to Calculate R:R for Any Trade
- Identify your entry price — Based on your analysis
- Set your stop loss — At a logical support/resistance level
- Set your take profit — At the next significant level
- Calculate — R:R = distance to TP / distance to SL
Example
- Entry: 1.0800
- Stop Loss: 1.0770 (30 pips risk)
- Take Profit: 1.0890 (90 pips reward)
- R:R = 90/30 = 1:3
Try it with our Risk/Reward Calculator.
Minimum R:R for Different Trading Styles
- Scalping: 1:1 to 1:1.5 (high win rate needed)
- Day Trading: 1:2 minimum (standard approach)
- Swing Trading: 1:2 to 1:4 (bigger targets with wider stops)
- Position Trading: 1:3 to 1:10 (trend following with large targets)
Common Mistakes
- Forcing R:R by using unrealistic take profits — A 1:5 R:R is meaningless if the take profit is above major resistance. Use realistic levels.
- Using tight stops for better R:R — This worsens your win rate. Place stops at logical levels, not arbitrary ones.
- Ignoring R:R completely — Trading without considering R:R is essentially gambling.
- Moving your take profit closer — This reduces your R:R and kills your edge over time.
FAQ
Is a 1:1 risk/reward ratio bad?
Not necessarily. Scalpers often use 1:1 successfully because they achieve high win rates (60-70%). However, for most trading styles, 1:2 or higher gives you a much bigger edge.
Should I skip trades that don't meet my minimum R:R?
Yes. Discipline is key. If a setup only offers 1:0.5 and your minimum is 1:2, skip it. There will always be more opportunities. This is one of the hardest but most impactful habits to develop.