Most traders focus on their win rate. They want to be right as often as possible. But a trader who wins 70% of the time can still lose money — if their losses are far bigger than their wins. The concept that explains this is the risk-reward ratio.
Understanding your risk-reward ratio is not optional. It is the foundation of whether your strategy can ever be profitable — regardless of how good your entries are.
What is a risk-reward ratio?
The risk-reward ratio (RRR) compares how much you risk on a trade to how much you aim to gain. A 1:2 ratio means you risk $1 to potentially make $2. A 1:3 ratio means you risk $1 to potentially make $3.
The ratio is always expressed as risk first, reward second. So when someone says "I trade with a 1:2," they mean their target is twice as large as their stop loss.
How to calculate your risk-reward ratio
In practice, you calculate it before entering a trade:
- Entry price: where you open the position
- Stop loss: where you exit if wrong (your risk)
- Take profit: where you exit if right (your reward)
If your entry is at 1.1000, your stop is at 1.0980 (20 pips risk), and your target is at 1.1040 (40 pips reward), your RRR is 1:2.
RRR and win rate: the real relationship
This is where most traders get it wrong. Win rate and RRR are inseparable. A high win rate with a poor RRR is worse than a low win rate with a strong RRR.
A trader with a 40% win rate and a 1:2 RRR is profitable. A trader with a 60% win rate and a 1:0.5 RRR is losing money. The numbers matter more than how often you feel "right."
Practical examples
10 trades: 4 wins × $200 = $800
6 losses × $100 = $600
10 trades: 6 wins × $50 = $300
4 losses × $100 = $400
Trader A wins less often but makes more money. Trader B is right most of the time but still loses. This is why obsessing over win rate alone is a trap.
What is a good risk-reward ratio?
There is no single "correct" RRR — it depends on your strategy and your win rate. That said, most professional traders use a minimum of 1:2. Here's a useful framework:
- 1:1 — Only viable with a win rate above 55%. Low margin for error.
- 1:2 — The most common standard. Breakeven at 34% win rate.
- 1:3 — Strong. Breakeven at 25% win rate. Works well with trend-following.
- 1:4+ — Aggressive targets. Can be very profitable but requires patience and wide stops.
The right RRR for you is the one that, combined with your actual win rate, produces a positive expectancy. Track both numbers to know where you stand.
Common mistakes with risk-reward ratios
- Moving the take profit closer — "locking in profits early" often destroys your RRR and turns a good trade into a mediocre one
- Moving the stop loss further — this makes your actual risk larger than planned without increasing the reward
- Using a fixed RRR regardless of setup — some setups warrant a 1:1.5, others a 1:4. Let the structure dictate the ratio
- Tracking planned RRR instead of actual RRR — if you exit early or move stops, your real RRR differs from what you planned
How to track your actual RRR
The most important number is not your planned RRR — it is your actual RRR averaged across all trades. Many traders plan a 1:2 but consistently exit early at 1:1. Their performance data tells a different story than their plan.
A trading journal lets you track both: what you planned and what actually happened. Over time, the gap between planned and actual RRR reveals exactly where discipline breaks down — and gives you something concrete to improve.
Frequently asked questions
Read also: What is expectancy in trading? · What is a good win rate? · Trading statistics every trader should track