Risk-Reward Ratio Explained: Why Win Rate Isn't Everything
The risk reward ratio compares what a trade could make with what it risks. Learn R multiples, break-even win rates, expectancy and how costs change it.
Most new traders judge themselves by one number: how often they win. It feels like the obvious score. Yet a trader who wins six trades in ten can lose money, while one who wins four in ten can come out ahead. The missing piece is the risk reward ratio.
Quick answer: The risk reward ratio compares how far your stop loss is from your entry with how far your target is. Risking 30 pips to make 60 is 1:2. The ratio sets your break-even win rate, 1 ÷ (1 + R), so at 1:2 you need to win only a third of your trades, before costs, to break even.
What is the risk-reward ratio?
The risk-reward ratio measures what a trade stands to gain against what it stands to lose. It uses two distances that you decide before you enter:
- Risk is the distance from your entry price to your stop loss.
- Reward is the distance from your entry price to your take profit target.
Divide the reward by the risk and you have the ratio. Buy EUR/USD at 1.0850 with a stop at 1.0820 and a target at 1.0910, and you are risking 30 pips to make 60. Sixty divided by thirty is 2, so this is a 1:2 trade.
The ratio does not tell you whether the trade is a good idea or how likely the target is. What it tells you is how often trades like this need to work for the method to pay its way, which is why it sits at the centre of forex risk management.
Risk-reward or reward-to-risk?
You will see the same trade written two ways. Risk-reward puts the risk first, so our trade is 1:2. Reward-to-risk puts the reward first, so it is 2:1. Both mean 30 pips at risk for 60 pips of potential gain. Our Academy lessons and calculators use the reward-to-risk form. When you read a ratio elsewhere, check which way round it is written.
Thinking in R multiples
Traders avoid the confusion by calling the distance to the stop 1R, one unit of risk. Any result can then be described as an R multiple: the profit or loss divided by the amount you risked. A trade that hits its stop is −1R. A trade that hits a target twice as far away is +2R. A trade you close early for 15 pips on a 30-pip stop is +0.5R.
R multiples strip out account size and position size. A +2R trade is +2R whether you risked $10 or $1,000, on EUR/USD or USD/JPY, on a five-minute chart or a daily one, so you can compare trades fairly.
Try the numbers yourself. Move the target further away and watch the ratio rise and the win rate you need fall. Then move the stop closer to the entry: the ratio improves in exactly the same way. That is where most of the trouble with risk-reward begins, as the sections below show.
Break-even win rate = 1 ÷ (1 + R), where R is the reward-to-risk ratio. Costs push the real figure a little higher.
The break-even win rate for each risk reward ratio
Every ratio carries a hidden requirement: the share of trades you must win just to stand still. This is the break-even win rate.
You can work it out without any algebra. Take three trades at 1:2. If one wins and two lose, you make +2R and lose 2 × 1R. The total is zero. So at 1:2 you need to win one trade in three to break even, and anything better than that is profit before costs. In general:
Break-even win rate = 1 ÷ (1 + R), where R is the reward divided by the risk.
| Risk-reward | Target in R | Break-even win rate | In plain words |
|---|---|---|---|
| 1:0.5 | 0.5R | 66.7% | two wins in every three trades |
| 1:1 | 1R | 50% | one win in every two |
| 1:1.5 | 1.5R | 40% | two wins in every five |
| 1:2 | 2R | 33.3% | one win in every three |
| 1:3 | 3R | 25% | one win in every four |
| 1:4 | 4R | 20% | one win in every five |
So losing more often than you win is fine at the right ratio. A method that wins 40% of the time at 1:2 is above its break-even line; one that wins 60% at 1:0.5 is below it.
The curve below plots the same formula.
The curve flattens. Moving from a 1R target to a 2R target cuts the win rate you need from 50% to 33%, a big improvement. Moving from 3R to 4R only takes it from 25% to 20%, yet the target is now a third further away and much harder to reach. Beyond about 2R to 3R, each extra unit of reward buys less and less, which matters a great deal once you accept that distant targets are hit less often. The Academy lesson on reward-to-risk has a short quiz on these numbers if you want to test yourself.
Expectancy: where win rate and R meet
Win rate on its own says nothing about whether a method makes money. Neither does the ratio. What you need is the two together, and the number that combines them is called expectancy:
Expectancy = (win rate × average win) − (loss rate × average loss)
Measured in R, expectancy tells you what an average trade is worth over many trades. A method that wins 40% of the time at 1:2 has an expectancy of (0.40 × 2R) − (0.60 × 1R) = 0.8R − 0.6R = +0.2R per trade. If 1R is $50, that is $10 per trade on average, across a long run of trades. It does not mean any single trade makes $10; each one makes +$100 or loses $50.
Now look at two very different traders:
- Trader A wins 70% of the time with targets of half the stop (1:0.5). Expectancy: (0.70 × 0.5R) − (0.30 × 1R) = 0.35R − 0.30R = +0.05R.
- Trader B wins only 35% of the time at 1:2. Expectancy: (0.35 × 2R) − (0.65 × 1R) = 0.70R − 0.65R = +0.05R.
Same expectancy, very different lives. Trader A is right most days and occasionally loses a chunk. Trader B is wrong almost two times in three and must sit through long runs of losses. Neither is better on paper; the right one is the one you can follow without breaking your rules. Both are also so close to zero that a little extra cost would push them below it.
The grid below shows expectancy across a range of win rates and ratios.
Two warnings come with the grid. First, the cells are not a menu. You cannot pick 60% and 1:3 because it looks attractive; for a given method, a bigger target almost always means a lower win rate. Second, expectancy is an average over many trades, and the order in which wins and losses arrive is random. A positive method still produces long losing streaks and deep drawdowns.
Run the simulator below a few times with a 40% win rate at 2:1 and 1% risk. The expectancy never changes, but the path does: some runs climb steadily, others spend weeks under water. Then drop the win rate to 30%.
Each run uses the same settings with different luck. Run it several times: the shape changes, the drawdowns don't go away.
This is why your risk per trade has to be small even when the method is sound. A low win rate, high R method in particular needs the account to survive the streaks between winners. The Academy lessons on risk per trade and drawdowns show how to size for the bad runs rather than the average ones.
The trade-off: bigger targets are hit less often
Win rate and R are not two separate dials. For any given entry and stop, moving the target further away lowers the chance of reaching it. A 1:1 target might be hit on most trades; a 1:5 target, on very few. The market does not know or care what ratio you wanted.
Put the target where the chart gives you a reason for it, as with the stop. For a buy, that is usually just in front of the next obvious resistance, such as a recent swing high, a level that has turned price before, or a round number. For a sell, it is just above the next support. The ratio is then whatever those two levels imply. If the stop belongs 30 pips away and the next resistance is 60 pips away, you have a 1:2 trade. If the next resistance is only 25 pips away, you have a 1:0.8 trade, and the honest response is usually to skip it rather than to pretend the resistance is not there.
Step through the chart below to see the difference between a target from the chart and a target from a rule.
The same buy with two targets. The 2R target sits just below resistance the chart already shows; the fixed 3R target sits beyond it. Price tags the resistance and turns, so only the chart-based target fills. Illustrative prices.
Why “always use 1:3” is a myth
You will often read that you should never take a trade below 1:3, or some other fixed number. The idea starts from a true observation, that a higher ratio lowers the break-even win rate, but skips the trade-off above. A fixed rule does two things to your trades, and neither is good.
It pushes targets past levels the market has reason to respect. When the next resistance is 60 pips away and your rule demands 90, you are betting on a breakout every time, whether or not the chart suggests one. Your win rate falls, often by more than the higher ratio makes up for. Compare a method that wins 50% at 1:1.5, with an expectancy of (0.50 × 1.5R) − 0.50R = +0.25R, with the same entries forced to 1:3 and winning only 20%: (0.20 × 3R) − 0.80R = −0.20R. The “better” ratio turned a working method into a losing one.
It also tempts you to tighten the stop. If the target cannot move up, the ratio can still be inflated by moving the stop closer. A 10-pip stop under a 60-pip target looks like a magnificent 1:6 trade. But if 10 pips sits inside the normal noise of the pair, the stop will be hit far more often and the real win rate collapses. Our guide on where to place a stop loss explains why the stop belongs where the idea fails, not where the arithmetic looks pretty, and the guide to support and resistance covers how to find the levels that set sensible targets.
A minimum ratio is still useful, as long as you use it the right way round: as a filter, not a target generator. “I only take trades where the chart offers at least 1.5R before the next obvious level” is a sound rule. “I always put my target at 3R” is not.
How trading costs reduce your real risk-reward
Every ratio so far has ignored costs. Real trades do not. You pay the spread on every trade, and on some accounts a commission as well. Both are paid whether the trade wins or loses, so they work against you in two directions at once: they make every loss a little bigger and every win a little smaller.
If your total cost is c pips per trade, a trade with a stop of s pips and a target of t pips really risks s + c to make t − c. The break-even win rate with costs becomes:
Break-even win rate with costs = (stop + cost) ÷ (stop + target)
Without costs, a 30-pip stop and 60-pip target gives 30 ÷ 90 = 33.3%, the familiar figure for 1:2. With a 1-pip cost it becomes 31 ÷ 90 = 34.4%. That is a small change, because the cost is small compared with the stop.
Now shrink the trade. The figure below compares two trades that are both 1:2 on paper, with the same 1.5 pips of total cost per trade.
On the short-term trade, the 1.5 pips of cost turn a 10-pip risk into 11.5 pips and a 20-pip reward into 18.5. The real ratio is 18.5 ÷ 11.5, about 1:1.6, and the break-even win rate rises from 33.3% to 11.5 ÷ 30, or 38.3%. On the swing trade, the same cost turns 40 and 80 into 41.5 and 78.5: about 1:1.9, needing 34.6%. Same ratio on paper, same cost, very different results. The smaller your stop, the bigger the share of each trade that costs consume.
Spread and commission are not the only leaks. Slippage on stop orders usually works against you, so some losses end up a little larger than 1R, and holding overnight can add swap charges. If you trade short timeframes with tight stops, measure your cost per trade in pips and put it into the break-even formula before you decide a method works. Our guide to forex trading costs breaks down all three, and the Academy lesson on trading costs shows how to compare accounts on the same basis.
Measuring your actual R in a trading journal
The ratio you plan is not the ratio you get. Once a trade is live, you close a winner early because it started to pull back, take partial profits, move a stop to break-even and get stopped out at zero, or see a stop slip by a pip or two. None of that shows up in the plan. All of it shows up in your account.
The only way to know your real numbers is to record every trade’s result as an R multiple in a trading journal. For each trade, divide the profit or loss by the amount you risked. After enough trades, you can calculate four numbers that describe your method far better than win rate alone:
- Win rate: winning trades ÷ all trades.
- Average win in R: total R from winners ÷ number of winners.
- Average loss in R: total R from losers ÷ number of losers.
- Expectancy: (win rate × average win) − (loss rate × average loss).
Here is what that looked like for one trader’s first 20 trades with the 1:2 plan from earlier.
The win rate was exactly what the trader hoped for: 8 wins out of 20, or 40%. On paper, 40% at 1:2 is worth +0.2R per trade, or +4R over 20 trades. In practice the eight winners added up to 14.4R, an average of 1.8R, and the twelve losers to 12.6R, an average of 1.05R. The net result was +1.8R, an expectancy of +0.09R per trade. Still positive, but less than half of what the plan implied, and close enough to zero that a little more cost or a few more early exits would wipe it out.
That gap is what the journal is for. It might lead you to a rule, such as never closing early without a written reason, or show that your early exits actually protect you. Either way, you are deciding from evidence. Try logging a trade in R below.
Trade journal
Saved in this browser only. Over fifty trades, the last column shows what breaking the plan costs you.
One caution: 20 trades is a first look, not a verdict. Small samples swing a great deal through luck alone, so judge a method on 50 to 100 trades taken the same way. Our full guide to keeping a trading journal and the Academy lesson on the trading journal set out a two-minute format and a weekly review.
A 1:2 risk reward trade, step by step
Here is the whole process on one trade, from the account to the expectancy, using the same EUR/USD levels as the figures above.
The ratio came out of the chart: the stop from the support, the target from the resistance, the size from the stop. The Academy lessons on stop-loss placement and position sizing go through those two steps in detail.
Common risk-reward mistakes
Judging a method by win rate alone
A high win rate feels like skill. It tells you nothing until you know the average win and average loss. Look at expectancy.
Pushing targets past obvious levels
Stretching a target beyond clear resistance or support to reach a favourite ratio lowers your win rate, often by more than the ratio gains. Skip trades where the room is not there.
Tightening the stop to improve the ratio
A closer stop makes the ratio look better and the trade worse. If the stop sits inside normal noise, it will be hit far more often than your break-even maths assumes.
Forgetting costs on short-term trades
On a 10-pip stop, a pip and a half of spread and commission turns 1:2 into roughly 1:1.6. Always work out the break-even win rate with costs included.
Changing the plan once the trade is live
Widening a stop turns a −1R loss into −1.5R or −2R. Grabbing small profits out of nerves turns +2R winners into +0.5R ones. Both quietly wreck the ratio you planned, and both are driven by emotion rather than evidence, as our guide to trading psychology explains. Regulated CFD providers in the UK and EU must disclose the share of their retail accounts that lose money, and it is usually well over half (see the Financial Conduct Authority for the retail rules).
Frequently asked questions
What is a good risk reward ratio?
There is no single good ratio. Many swing traders use a minimum of about 1:1.5 or 1:2 as a filter, skipping trades where the chart offers less. But a ratio only means something together with the win rate that method actually achieves. A 1:1.5 method that wins half the time beats a 1:3 method that wins one time in five.
How do you calculate the risk reward ratio?
Measure the distance in pips from your entry to your stop loss, and from your entry to your target. Divide the target distance by the stop distance. Buying at 1.0850 with a stop at 1.0820 and a target at 1.0910 risks 30 pips to make 60, so the ratio is 60 ÷ 30 = 2, written 1:2 or 2:1.
What win rate do I need with a 1:2 risk reward?
Before costs, 33.3%: one winning trade in three. Costs push it higher. With a 30-pip stop, a 60-pip target and about 1 pip of cost per trade, you need 34.4%. Because results over a few dozen trades vary with luck, you want your measured win rate comfortably above break-even, not just touching it.
What is an R multiple in trading?
An R multiple is a trade's result divided by the amount you risked on it. If you risk $50 and lose it, that is −1R; if you make $100, it is +2R. Recording results in R lets you compare trades of different sizes, pairs and timeframes, and calculate your real average win, average loss and expectancy.
Is a 1:3 risk reward ratio better than 1:1?
Not by itself. A 1:3 trade needs only a 25% win rate to break even, against 50% for 1:1, but targets three times the stop away are reached less often. Which is better depends on the expectancy each produces with your method, after costs, measured over many trades in your journal.
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