Here's a surprising truth that most beginner traders don't realize:
The secret? Risk-reward ratio.
While amateur traders obsess over win rate and "high-probability" setups, professional traders focus on something more important: making more when they're right than they lose when they're wrong.
In this guide, you'll learn exactly how risk-reward ratios work, what ratio you should aim for, and how to calculate it for every trade.
What Is Risk-Reward Ratio?
It's expressed as a ratio:
Why Risk-Reward Ratio Matters More Than Win Rate
Let's compare two traders over 10 trades:
| Trader A (High Win Rate) | Trader B (High R:R) | |
|---|---|---|
| Win Rate | 70% | 40% |
| Wins | 7 trades | 4 trades |
| Losses | 3 trades | 6 trades |
| Avg Win | $50 | $200 |
| Avg Loss | $100 | $100 |
| R:R Ratio | 1:0.5 (bad) | 1:2 (good) |
| Net Profit | +$50 | +$200 |
Trader A: (7 × $50) - (3 × $100) = $350 - $300 = $50 profit
Trader B: (4 × $200) - (6 × $100) = $800 - $600 = $200 profit
How to Calculate Risk-Reward Ratio
Method 1: Using Dollar Amounts
Method 2: Using Pips
Visual Example
Entry Price: 1.0850
Stop Loss: 1.0800 (50 pips below)
Take Profit: 1.0950 (100 pips above)
Risk: 50 pips
Reward: 100 pips
R:R Ratio: 1:2 ✓
With 0.2 lots ($2 per pip):
Risk: 50 × $2 = $100
Reward: 100 × $2 = $200
Still 1:2 ✓
The Win Rate Formula: What You Actually Need
Here's the mathematical truth about risk-reward and win rate:
| Risk:Reward | Breakeven Win Rate | Profitable at 50% WR? |
|---|---|---|
| 1:1 | 50% | Break-even |
| 1:1.5 | 40% | Yes (+25%) |
| 1:2 | 33% | Yes (+50%) |
| 1:3 | 25% | Yes (+100%) |
| 2:1 | 67% | No (-33%) |
What's the Best Risk-Reward Ratio?
There's no universal "best" ratio—it depends on your trading style. Here's what works for each approach:
Day Trading & Swing Trading: 1:2 to 1:3
- Why: Balances achievable targets with reasonable win rates
- Win rate needed: 33-40%
- Example: Risk 20 pips to make 40-60 pips
Scalping: 1:1 to 1:1.5
- Why: Quick exits require tighter targets
- Win rate needed: 50-60%
- Example: Risk 5 pips to make 5-7 pips
Position Trading: 1:3 to 1:5+
- Why: Longer timeframes allow larger moves
- Win rate needed: 25-33%
- Example: Risk 100 pips to make 300-500 pips
Real Trading Examples
Example 1: Perfect 1:2 Setup
Entry: 1.0850
Stop Loss: 1.0820 (below breakout level)
Take Profit: 1.0910 (next resistance level)
Calculation:
Risk: 30 pips
Reward: 60 pips
R:R: 1:2 ✓
Position Size (1% risk on $10k account):
Risk: $100
$100 / 30 pips = $3.33 per pip
Position: 0.33 lots
Outcome if win: +$200
Outcome if loss: -$100
Example 2: Excellent 1:3 Setup
Entry: 1.2650
Stop Loss: 1.2620 (below support)
Take Profit: 1.2740 (previous high)
Calculation:
Risk: 30 pips
Reward: 90 pips
R:R: 1:3 ✓
Position Size (1% risk on $10k account):
Risk: $100
$100 / 30 pips = $3.33 per pip
Position: 0.33 lots
Outcome if win: +$300
Outcome if loss: -$100
With this 1:3 ratio, you only need a 25% win rate to profit!
Example 3: Poor Risk-Reward (AVOID)
Entry: 1.0850
Stop Loss: 1.0800 (50 pips)
Take Profit: 1.0875 (25 pips)
Calculation:
Risk: 50 pips
Reward: 25 pips
R:R: 2:1 (TERRIBLE) ✗
Why this fails:
You need a 67% win rate just to break even.
Even at 60% win rate, you lose money.
NEVER take this trade.
How to Set Proper Stop Loss and Take Profit Levels
Step 1: Set Stop Loss First (Based on Market Structure)
Your stop loss should be based on technical levels, NOT arbitrary pip counts:
- Below/above support/resistance
- Below/above swing high/low
- Beyond a chart pattern boundary
- 2x ATR (Average True Range) from entry
Step 2: Identify Realistic Take Profit
Your target should align with market structure:
- Next significant support/resistance level
- Fibonacci extension levels (127.2%, 161.8%)
- Previous swing high/low
- Round numbers (psychological levels)
Step 3: Calculate the Ratio
Only after steps 1 and 2 should you calculate R:R.
Advanced: Partial Profit Taking
Professional traders often use scaled exits to improve overall R:R:
Entry: 1.0850 (1.0 lot position)
Stop Loss: 1.0820 (30 pips risk)
Exit Strategy:
• Take 50% (0.5 lots) at 1.0880 (1:1 = 30 pips)
• Move stop to breakeven
• Let 50% run to 1.0940 (1:3 = 90 pips)
Outcome if both targets hit:
First half: 30 pips × 0.5 lots = 15 pips
Second half: 90 pips × 0.5 lots = 45 pips
Total: 60 pips on 1.0 lot position
Effective R:R: 1:2 (60 pips gain / 30 pips risk)
Common Risk-Reward Mistakes
Mistake #1: Moving Stop Loss to Avoid Taking a Loss
Scenario: Trade approaches your stop, so you move it further away "to give it room."
Why it's deadly: This turns a controlled 1:2 trade into an unlimited risk trade. You're no longer trading—you're gambling.
Mistake #2: Taking Profit Too Early
Scenario: You planned a 1:2 trade (60-pip target) but exit at 30 pips because "profit is profit."
Why it fails: You just turned your 1:2 edge into 1:1. Now you need 50% win rate instead of 33%. Over 100 trades, this costs you thousands.
Mistake #3: Forcing Trades with Poor R:R
Scenario: Great setup, but natural target is only 1:1. You take it anyway because "it's high probability."
Reality: Even at 65% win rate with 1:1 R:R, you'll barely profit after spreads and commissions.
Using Our Risk-Reward Calculator
Calculate your R:R ratio instantly with our free tool:
- Enter your entry price
- Enter your stop loss level
- Enter your take profit level
- See your R:R ratio and required win rate
The Expectancy Formula
Want to know if your strategy is actually profitable? Use the expectancy formula:
Positive expectancy = profitable strategy. Negative = losing strategy.
Quick Reference: R:R and Win Rate Combinations
| Risk:Reward | 20% WR | 30% WR | 40% WR | 50% WR | 60% WR |
|---|---|---|---|---|---|
| 1:1 | -60% | -40% | -20% | 0% | +20% |
| 1:1.5 | -50% | -25% | 0% | +25% | +50% |
| 1:2 | -40% | -10% | +20% | +50% | +80% |
| 1:3 | -20% | +20% | +60% | +100% | +140% |
Numbers show return per dollar risked over 100 trades
Conclusion: Make Math Your Edge
Trading isn't about predicting the future with perfect accuracy. It's about having a mathematical edge and executing it consistently.
✓ Minimum 1:2 risk-reward on all trades
✓ Set stops based on market structure, not desired R:R
✓ Only adjust targets based on technical levels
✓ Never move stop loss once in a trade
✓ Calculate expectancy to verify your edge
✓ Remember: You don't need high win rate if R:R is good
The traders who understand and respect risk-reward ratios are the ones who survive and thrive. The ones who ignore it are the 90% who fail.
Which group will you be in?
Calculate Your Risk-Reward Ratio Now →
Related Articles:
• How to Calculate Position Size in Forex Trading
• The 1% Risk Rule: Complete Trading Guide
• Understanding Pips in Forex: Beginner's Guide
Disclaimer: All examples are for educational purposes. Trading involves risk. Past performance does not guarantee future results. Always use proper risk management.