Risk Reward Ratio Explained: How to Use It With Your Win Rate
The risk reward ratio compares how much you could lose on a trade with how much you could gain. It is one of the simplest ideas in trading, and one of the most misused. On its own, a ratio tells you very little. Combined with your win rate, it tells you whether your trading can make money over time. This guide explains both.
What is the risk reward ratio?
Risk is the distance from your entry to your stop loss. Reward is the distance from your entry to your take profit. The ratio is usually written as risk : reward.
Use our risk reward calculator to work it out from prices directly.
Thinking in R
Many traders measure results in “R”, where 1R is the amount risked on a trade. A trade that hits a 1:2 target earns +2R. A trade that hits its stop loses −1R. Measuring in R lets you compare trades of different sizes and see how your strategy really performs, regardless of account size.
The break-even win rate
Every ratio has a minimum win rate needed to break even (before costs):
| Risk : reward | Break-even win rate |
|---|---|
| 1 : 0.5 | 66.7% |
| 1 : 1 | 50.0% |
| 1 : 1.5 | 40.0% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25.0% |
| 1 : 4 | 20.0% |
This shows why the ratio alone is meaningless. A strategy with a 1:3 ratio and a 20% win rate loses money. A strategy with a 1:1 ratio and a 60% win rate makes money.
Expectancy: the number that matters
Expectancy combines ratio and win rate into the average result per trade:
A positive expectancy means the strategy makes money over many trades. A negative one means it loses, however good individual trades feel. Enter your win rate into the risk reward calculator to see your expectancy.
Why bigger targets are not always better
It is tempting to set every target at 1:3 or more. But wider targets are reached less often. When you move the target further away, your win rate usually falls. The question is whether it falls more or less than the ratio improves.
Only your own trading data can answer that. Record every trade in a trading journal, including the maximum favourable move each trade reached. After 50 to 100 trades you can see which target distance gives the best expectancy for your strategy.
Setting targets that make sense
The ratio should come from the chart, not from wishful thinking. Good targets sit just before a level where price is likely to react:
- The next support or resistance level.
- A recent swing high or low.
- Daily or weekly pivot levels.
- Fibonacci extension levels.
- The pair’s average daily range, if the day has already covered most of it.
If the nearest realistic target only offers a 1:0.8 ratio with a sensible stop, the trade may not be worth taking.
Partial profits and the real ratio
Many traders close part of a position at the first target and let the rest run. This raises the win rate but lowers the average reward. Work out your real average reward from the journal, not from the targets you planned. A plan of 1:3 that you regularly close early at 1:1 is really a 1:1 strategy.
How costs change the numbers
Spread and commission reduce every winning trade and increase every losing one. On short-term trades this matters a lot.
See our guide to forex trading costs for more.
Risk per trade still matters most
Even a strategy with positive expectancy will have losing streaks. With a 45% win rate, a run of 8 losses in a row is quite possible over a few hundred trades. If you risk 1% per trade, that streak costs about 8%. If you risk 5%, it costs about a third of your account. Keep risk per trade small with the lot size calculator so you can survive long enough for your edge to work.
Frequently asked questions
What is a good risk reward ratio for beginners?
Many beginners start with a minimum of about 1:1.5 to 1:2, because it allows a strategy to be profitable with a win rate below 50%. More important than the exact ratio is recording your results so you know your real win rate and expectancy.
Should I always use the same ratio?
Not necessarily. The target should be based on the chart. On some trades the next key level offers 1:3, on others only 1:1. Many traders set a minimum ratio and skip trades that cannot reach it.
Does a higher ratio mean less risk?
No. The ratio describes the relationship between stop and target. Your risk is set by position size and stop distance. A 1:4 trade with a large lot size can still lose far more than you can afford.
How many trades do I need before trusting my statistics?
A rough guide is at least 30 to 50 trades of the same setup, and ideally 100 or more. Small samples are heavily affected by luck, so a short winning or losing run says little about the strategy itself.
Key takeaways
- The risk reward ratio compares stop distance with target distance.
- A ratio is only meaningful alongside your win rate.
- Expectancy shows whether a strategy makes money over many trades.
- Set targets at real chart levels and measure your actual results in a journal.