Risk-to-Reward Ratio
You don't need to be right most of the time
Risk-to-Reward (R:R) ratio compares how much you stand to lose if a trade goes wrong (risk, i.e. distance to stop-loss) against how much you stand to gain if it goes right (reward, i.e. distance to take-profit). A 1:2 ratio means risking 1 unit to potentially gain 2; 1:3 means risking 1 to potentially gain 3.
Why this changes the win-rate math
With a consistent 1:2 R:R, you can be profitable overall even winning only 40% of trades, because each win recovers more than two losses' worth. This is the single most important reason professional traders obsess over R:R before ever placing a trade — it decouples long-term profitability from needing to be right most of the time.
- At 1:1 R:R, you need > 50% win rate just to be profitable (ignoring costs).
- At 1:2 R:R, roughly 34%+ win rate can be profitable.
- At 1:3 R:R, roughly 25%+ win rate can be profitable.
- These are simplified break-even thresholds ignoring spread/commission — real costs raise the bar slightly.
Key Formula / Concept — Risk-to-Reward Ratio
R:R = Potential Reward ÷ Potential Risk
Entry at 1.1000, stop-loss at 1.0950 (50-pip risk), take-profit at 1.1100 (100-pip reward) → R:R = 100 ÷ 50 = 1:2.
Pro Tip
A trade with a poor R:R (like 1:0.5 — risking more than you stand to gain) needs an unrealistically high win rate just to break even. Before asking "will this trade win?", ask "is this trade's R:R even worth taking if I'm wrong half the time?"
Risk Warning
A great R:R on paper doesn't protect you if you move your stop-loss further away mid-trade to "give it more room" once it's losing. That single habit — widening a stop after entry — quietly turns a planned 1:2 trade into an unplanned, unbounded one, and is one of the fastest ways disciplined position sizing stops meaning anything.
Try it: enter your own entry, stop-loss, and take-profit to see the dollar risk, dollar reward, and R:R ratio.
Risk / Reward Ratio Calculator
R:R = Potential Reward ÷ Potential Risk
Risk
$500
Reward
$1,000
R:R Ratio
1:2
For informational purposes only, not financial advice.
Checkpoint Quiz
Checkpoint Quiz
Question 1 of 5A trade risks 40 pips to potentially gain 120 pips. What is the Risk-to-Reward ratio?