Risk-Reward Ratio in Trading Explained (With Examples)

Key takeaways

The risk-reward ratio compares the distance from entry to your stop-loss (risk) against the distance from entry to your target (reward), written as 1:2, 1:3 and so on, in the same units on both sides.
Calculate it by dividing the reward distance by the risk distance; lot size does not change the ratio because it scales both sides equally.
A ratio is meaningless without your win rate: a 1:2 ratio breaks even at roughly a one-in-three win rate, while higher reward multiples need fewer winners but tend to win less often.
Expectancy — win rate combined with average reward versus average loss — is what decides whether a strategy actually makes money over many trades, before and after costs like the spread.
Set a logical stop and a realistic target first, then read off the ratio; never manufacture a flattering ratio by moving the stop or target, and log real outcomes to check your true ratio and win rate. Leveraged trading carries a high risk of loss.

What the risk-reward ratio means

The risk-reward ratio in trading compares the amount you are prepared to lose on a trade with the amount you expect to gain if it works out. It is written as two numbers, such as 1:2 or 1:3. The first number is your risk — the distance from your entry to your stop-loss. The second is your reward — the distance from your entry to your profit target. A 1:2 ratio simply means you are risking one unit to potentially make two.

Crucially, the ratio is measured in the same units on both sides, almost always in pips or in cash. If your stop-loss sits 20 pips from entry and your take-profit sits 40 pips from entry, your risk-reward ratio is 20:40, which simplifies to 1:2. The actual lot size does not change the ratio, because it scales both the potential loss and the potential gain by the same amount.

Traders also describe reward in terms of R, where one R is the amount risked on the trade. A target at twice your risk is a 2R target; hitting it is a 2R win. Thinking in R lets you compare trades of very different sizes on a level footing, because every trade is measured against its own risk.

How to calculate your risk-reward ratio

Calculating the ratio takes three prices you should already know before you enter: your planned entry, your stop-loss, and your profit target. Risk is the distance from entry to stop. Reward is the distance from entry to target. Divide the reward distance by the risk distance and you have the ratio.

Here is a worked example, with illustrative numbers. You plan to enter EUR/USD at 1.1000, place a stop-loss at 1.0980, and set a take-profit at 1.1060. Your risk is 20 pips (1.1000 down to 1.0980) and your reward is 60 pips (1.1000 up to 1.1060). That gives a risk-reward ratio of 20:60, or 1:3 — you are risking one to make three.

Note what the ratio does not tell you: how likely either outcome is. A 1:5 ratio looks attractive on paper, but if the target is so far away that price rarely reaches it, the trade can still lose money over time. The ratio describes the shape of a single trade's payoff, not the probability of winning it. That is why it must always be read alongside your win rate.

Why the ratio means nothing without your win rate

A risk-reward ratio is only half of the equation. The other half is your win rate — the percentage of trades that reach their target rather than their stop. The two combine to produce your expectancy: the average amount you can expect to win or lose per trade over a long series.

The relationship is intuitive once you see the break-even point. With a 1:1 ratio, you need to win more than half your trades just to break even before costs. With a 1:2 ratio, you only need to win about one trade in three to break even, because each winner pays for two losers. With a 1:3 ratio, winning roughly one in four covers your losses. A higher reward multiple lowers the win rate you need, but it usually comes with a lower win rate in practice, because more distant targets are reached less often.

This trade-off is the heart of the matter. A scalping style might run a 1:1 ratio with a 60% win rate; a trend-following style might run 1:4 with a 30% win rate. Both can be profitable, and both can fail. Neither the ratio nor the win rate is meaningful in isolation — only their combination tells you whether a strategy has a positive edge.

Turning risk-reward into expectancy

Expectancy puts a number on whether a strategy makes money on average. A simple way to express it: expectancy per trade equals (win rate multiplied by average win) minus (loss rate multiplied by average loss). If the result is positive, the strategy has a mathematical edge over many trades; if it is negative, no amount of discipline will make it profitable.

Consider an illustrative example. Suppose you risk one R per trade, your targets are at 2R, and you win 40% of the time. Out of 100 trades, 40 winners at +2R produce +80R, and 60 losers at -1R produce -60R. The net is +20R over 100 trades, or an average of +0.2R per trade. Lower the win rate to 30% with the same 1:2 ratio and the maths flips negative, showing how sensitive the outcome is to both inputs.

Two cautions keep this honest. First, costs are real: the spread and any commission widen your effective risk and shrink your reward, so a 1:2 trade on the chart can be closer to 1:1.7 after costs. Second, these are averages over a large sample — any short run of trades can look very different. Leveraged forex and CFD trading carries a high risk of loss, and a positive expectancy reduces, but never removes, that risk.

Using risk-reward sensibly in real trading

The most common mistake is choosing a position size first and then setting a target wherever it produces a flattering ratio. The disciplined order is the reverse: find a logical stop-loss level on the chart, find a realistic target the market can plausibly reach, and only then read off the ratio that results. If that ratio is poor, the answer is to skip the trade, not to move the stop closer or the target further to manufacture a better number.

Once your stop distance is fixed, position sizing and risk-reward work together. You decide how much of your account to risk — many traders use a small fixed percentage, an approach covered in our guide to the 1% rule — and then a position size calculator turns your stop distance into the correct lot size. The ratio shapes the reward; your sizing rule caps the risk. The two are separate decisions that should never be blurred.

Avoid chasing extreme ratios for their own sake. A 1:10 target that price almost never reaches will quietly bleed an account through repeated small losses, while a realistic 1:1.5 or 1:2 that fits the actual market structure can be far more durable. Targets should be justified by where price is likely to stall — prior highs and lows, round numbers, support and resistance — not by the ratio you wish you had.

Finally, the only way to know your true ratio and win rate is to measure them. Recording every trade in a trading journal — the planned ratio, the actual exit, and the result in R — reveals whether your real expectancy matches your plan. Many traders discover their average winner is smaller than intended because they take profit early, quietly turning a planned 1:2 into a much weaker 1:1.2 that needs a far higher win rate to stay profitable.

Frequently asked questions

What is a good risk-reward ratio in trading?

There is no single correct figure, and this is educational information rather than advice. Many traders look for at least 1:2, meaning they aim to make twice what they risk, because it lets them be profitable while winning fewer than half their trades. But a ratio is only good if the target is realistic and your win rate supports it — a high ratio with targets that rarely get hit can still lose money over time.

How do I calculate a risk-reward ratio?

Take three prices you set before entering: your entry, your stop-loss, and your profit target. The risk is the distance from entry to stop, and the reward is the distance from entry to target, both measured in pips. Divide the reward distance by the risk distance. For example, a 20-pip stop and a 60-pip target give 60 divided by 20, which is a 1:3 ratio.

Does a higher risk-reward ratio mean a better trade?

Not on its own. A higher ratio lowers the win rate you need to break even, but more distant targets are usually reached less often, so the win rate tends to fall as the ratio rises. What matters is expectancy — the ratio and win rate combined. A modest 1:2 with a reliable win rate can easily outperform an extreme 1:10 whose target is almost never hit.

How does risk-reward relate to position sizing?

They are separate but complementary decisions. The risk-reward ratio is set by where you place your stop and target relative to your entry. Position sizing decides how many lots you trade so that hitting the stop costs only a fixed, planned amount of your account. You set the stop first, then size the position to it; a position size calculator does the arithmetic for your pair and account.

What is the difference between risk-reward ratio and win rate?

The risk-reward ratio describes the payoff shape of a single trade — how much you stand to gain versus lose. The win rate is the percentage of trades that reach their target over many attempts. The ratio is about the size of wins and losses; the win rate is about how often you win. You need both to judge whether a strategy has a positive edge.

Put it into practice

Position size calculator The 1% risk rule Trading journal

Educational disclaimer. This guide is for information only and is not investment advice or a recommendation to trade. Leveraged forex and CFD trading carries a high risk of losing money quickly. Always do your own research.