Risk & Money Management · Beginner · 5 min
Risk-reward ratio
You can calculate a risk-reward ratio and the win rate needed to break even, and explain why the ratio alone does not make a trade good.
Risk 100 to win what?
Would you risk 100 to win 50? Most people would hesitate. To win 300? That sounds much more interesting.
Traders face this question before every trade, whether they think about it or not. The answer decides how often they need to be right to come out ahead. This lesson shows how to measure it and why it is only half of the picture.
Risk 2, reward 4
The risk-reward ratio compares what a trade can lose, from entry to stop, with what it is planned to gain, from entry to target.
In the chart:
- Entry 50.40, stop 48.40: the risk is 2.00 per share.
- Target 54.40: the planned reward is 4.00 per share.
- 4.00 ÷ 2.00 = 2, so the ratio is 1 : 2. For each unit risked, the trade aims for two.
Traders often measure results as an R-multiple: the result divided by the amount risked, R. A loss at the stop is −1R. A win at this target is +2R. A trade that is closed halfway to the target makes about +1R. R makes trades with different sizes comparable.
The ratio sets a hurdle: the breakeven win rate, the share of trades that must win for the trader to break even before costs. It equals risk ÷ (risk + reward):
- 1 : 1 needs 50% winners.
- 1 : 2 needs about 33%.
- 1 : 3 needs 25%.
That is why a trader can lose more often than they win and still come out ahead, as the lesson on probabilities showed.
But the ratio is a plan, not a promise. A distant target is reached less often than a close one. Setting a target five times further than the stop does not create a 1 : 5 trade if the price rarely gets there. A useful target is based on the chart, such as a previous high, not on the ratio you would like.
Higher ratio, lower hurdle
A fictional trader risks 100 per trade and compares three plans over 20 trades.
- 1 : 1 with 9 wins and 11 losses. 9 × 100 − 11 × 100 = −200.
- 1 : 2 with 7 wins and 13 losses. 7 × 200 − 13 × 100 = +100.
- 1 : 3 with 4 wins and 16 losses. 4 × 300 − 16 × 100 = −400.
The 1 : 2 plan wins least often of the first two and still makes money. But the 1 : 3 plan loses, because its distant target was reached only 4 times, below its 25% hurdle. Costs would lower all three results further. Neither the ratio nor the win rate alone tells you whether a plan works. Both together do.
Common mistakes
- Moving the target to improve the ratio. The market decides what is reachable, not the calculator.
- Ignoring costs. Spreads and fees raise the real break-even win rate.
- Taking profit at +0.5R out of fear. Small wins and full losses push the ratio below what was planned.
- Judging a ratio without a win rate. You need both to know the expected value.
- Choosing the target first and the stop second. The stop comes from where the idea fails, the target from the chart.
The takeaway
Risk-reward compares possible loss with possible gain. The more reward per unit of risk, the less often you need to be right.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the ratio that needs the lowest win rate to break even.
Tap the chart.
With three times as much reward as risk, one win pays for three losses, so 25% wins break even before costs.
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2Entry 50.40, stop 48.40, target 54.40. What is the risk-reward ratio?
Risk is 50.40 − 48.40 = 2.00. Reward is 54.40 − 50.40 = 4.00. 4 ÷ 2 = 2, so 1 : 2.
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3A trade risks 150 and gains 450. What is the result as an R-multiple?
R is the amount risked. 450 ÷ 150 = 3, so the trade made +3R.
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4Why does a 1 : 5 ratio not automatically make a trade good?
What counts is the ratio together with how often the target is actually reached. Both come from the market, not from your wish.
of 4 correct.