Risk-Reward Ratio Explained
The risk-reward ratio compares what you stand to gain against what you risk on a trade. Combined with win rate it decides whether a strategy makes money at all.
What is the risk-reward ratio?
If you risk $100 to make $200, your reward-to-risk is 2:1, often written as 2R. Expressing profit and loss in R multiples (multiples of the amount risked) lets you compare trades on any instrument at any size.
R:R only tells half the story — it must be paired with win rate. A 3:1 strategy that wins 30% of the time is profitable; a 1:1 strategy that wins 45% loses money after costs.
Break-even win rate
Each R:R has a break-even win rate: 1:1 needs >50%, 2:1 needs >33%, 3:1 needs >25%. Anything above that line is positive expectancy. Expectancy per trade = (win% × reward) − (loss% × risk).
Higher R:R lets a lower win rate stay profitable and, crucially, reduces risk of ruin because winners cover more losers. Set the target from structure — a real level — not from a wish.
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What is a good risk-reward ratio?
Many traders aim for at least 2:1, meaning the target is twice the stop distance. What matters is that the R:R and your win rate together produce positive expectancy.
What win rate do I need for 2:1 risk-reward?
Above roughly 33% to break even before costs. Any win rate above that with a 2:1 ratio is profitable over a large sample.
How do I calculate expectancy?
Expectancy per trade = (win rate × average reward in R) − (loss rate × average risk in R). Positive expectancy means the strategy makes money over many trades.