What is the risk-reward ratio?
Written by an ex-institutional trader. What the risk-reward ratio is, shown with a diagram, how to calculate it, what counts as a good ratio, and how it combines with your win rate to decide whether a strategy actually makes money.
Direct answer
The risk-reward ratio compares how much you stand to lose on a trade against how much you stand to gain, measured from your entry to your stop loss versus your entry to your target. A ratio of 1:2 means you are risking one unit to make two: a 30-pip stop and a 60-pip target. It is one of the most important numbers in trading because it sets how often you need to be right to make money.
The reason it matters is that risk-reward and win rate work together. A high reward-to-risk ratio lets you be profitable even when you lose more trades than you win. At 1:2, you only need to win about 34 percent of the time to break even. This is why professionals focus on finding trades where the potential reward clearly outweighs the risk, rather than on being right all the time, which is impossible.
What it is
The risk-reward ratio compares how much you stand to lose on a trade against how much you stand to gain. It is measured from your entry: the distance to your stop loss is the risk, and the distance to your target is the reward. A ratio of 1:2 means you are risking one unit to make two, for example a 30-pip stop and a 60-pip target.
It is one of the most important numbers in trading because, together with your win rate, it decides whether a strategy makes money. Crucially, it shifts the focus away from being right, which no one can do consistently, and toward finding trades where the potential reward clearly outweighs the risk.
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How to calculate it
Divide the reward by the risk. The risk is the distance from your entry to your stop; the reward is the distance from your entry to your target. The diagram shows a 1:2 trade: the stop sits one unit below the entry, the target two units above.
So a 20-pip stop with a 60-pip target is 60 / 20 = 3, a 1:3 ratio. It works the same in pips, points or dollars. Pairing the ratio with the position size calculator ties the risk side to a fixed dollar amount.
Risk-reward and win rate
The ratio only means something alongside your win rate, because the two trade off. The higher your reward-to-risk, the fewer trades you need to win to break even.
| Risk-reward ratio | Break-even win rate |
|---|---|
| 1:1 | 50% |
| 1:1.5 | 40% |
| 1:2 | ~34% |
| 1:3 | 25% |
| 1:5 | ~17% |
This is the key insight: at 1:3, you can be wrong three times out of four and still break even. It is why a strategy that loses more trades than it wins can be highly profitable, and why judging trading on win rate alone is misleading. What matters is expectancy: win rate and ratio combined.
What is a good ratio
A ratio of 1:2 or better is the common benchmark, with many traders aiming for 1:2 to 1:3. But there is no universally correct number, because the right ratio depends on your strategy and its natural win rate:
- Trend following tends to run a high ratio (1:3 and up) with a lower win rate, relying on a few big winners.
- Range or scalping strategies often run a lower ratio (around 1:1) with a higher win rate.
Both can be profitable. The mistake is forcing one without regard to the other. A 1:5 target your strategy reaches only rarely is worse than a realistic 1:2 it hits often. Aim for the ratio that maximises expectancy for how you actually trade.
Common mistakes
The usual risk-reward errors:
- Ignoring it entirely. Taking trades without checking the ratio is how traders end up risking three to make one, the road to slow ruin.
- Moving the target closer. Cutting winners short to bank profit destroys your ratio and your edge.
- Widening the stop to "give it room." This shrinks the ratio and turns a small loss into a large one.
- Chasing extreme ratios. A ratio your strategy rarely achieves is not an edge.
Used properly, the risk-reward ratio keeps you in trades where the maths is on your side. Pair it with the stop loss, position sizing and the drawdown calculator, learn the setups, and trade through an ASIC broker from the best forex brokers in Australia ranking.
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Diagram is illustrative. Last reviewed: 2026-06-01.
Frequently asked questions
What is the risk-reward ratio in trading?
The risk-reward ratio compares the amount you risk on a trade to the amount you aim to gain. It is measured as the distance from your entry to your stop loss (the risk) against the distance from your entry to your target (the reward). A 1:2 ratio means risking one unit to potentially make two, for example a 25-pip stop loss and a 50-pip profit target. It is a core risk-management number because it determines how often you need to win to be profitable overall.
How do you calculate the risk-reward ratio?
Divide the potential reward by the potential risk. The risk is the distance in pips or price from your entry to your stop loss; the reward is the distance from your entry to your target. If your stop is 20 pips away and your target is 60 pips away, the ratio is 60 divided by 20, which is 3, written as 1:3. You can work it out in pips, points or dollars; the ratio is the same. Most trading platforms show it automatically when you place a trade with a stop and target.
What is a good risk-reward ratio?
A ratio of 1:2 or better is widely considered good, meaning the potential reward is at least twice the risk. Many professional traders aim for 1:2 or 1:3. There is nothing magic about these numbers; a higher ratio simply means you can be profitable with a lower win rate. The right ratio depends on your strategy, because risk-reward and win rate trade off against each other: a scalping strategy may run a lower ratio with a high win rate, while a trend strategy runs a high ratio with a lower one.
How does the risk-reward ratio affect win rate?
The two work together to determine profitability. The higher your reward-to-risk ratio, the lower the win rate you need to break even. At 1:1 you need to win more than 50 percent of trades; at 1:2 you only need about 34 percent; at 1:3 you only need about 25 percent. This is why a strategy that loses more trades than it wins can still be highly profitable, as long as the winners are large enough relative to the losers. Judging a strategy on win rate alone is misleading without the ratio.
Is a higher risk-reward ratio always better?
Not necessarily, because a higher ratio usually comes with a lower win rate. Setting a very distant target to achieve a 1:5 ratio means price has to travel much further, so fewer trades reach it. The best ratio is the one that maximises your overall expectancy, the combination of win rate and average win versus average loss, for your specific strategy. Chasing an extreme ratio that your strategy rarely achieves is as much a mistake as taking poor 1:1 trades.
What is expectancy in trading?
Expectancy is the average amount you can expect to win or lose per trade over many trades, combining your win rate and your risk-reward ratio. It is calculated as (win rate x average win) minus (loss rate x average loss). A positive expectancy means the strategy makes money over time; a negative one means it loses, no matter how good individual trades feel. The risk-reward ratio is one of the two inputs to expectancy, which is why it matters so much more than being right on any single trade.
