A positive risk‑reward ratio is the secret to long‑term profitability. Learn how to calculate it, what ratios make sense, and how to combine it with your win rate.
The risk‑reward ratio (R:R) compares the potential loss of a trade to its potential gain. If you risk 20 pips to make 40 pips, your ratio is 1:2 (you stand to gain twice what you risk).
A good R:R doesn’t guarantee profits – you still need a decent win rate – but it ensures that you can be wrong more often than right and still come out ahead. This article shows you how to set realistic targets and why the ratio matters more than the direction of a single trade.
If risk = 20 pips and reward = 40 pips, R:R = 40/20 = 2 (written as 1:2).
Most professionals aim for at least 1:2. Scalpers may use 1:1, but need a very high win rate.
Break‑even win rate = 1 / (1 + R:R). For 1:2, you need only 33.3% wins to break even.
Don’t pick random ratios. Use support/resistance, Fibonacci, or ATR to set realistic take‑profit levels.
Your overall profitability depends on both your win rate and your average risk‑reward ratio. The formula for expected value per trade:
Expectancy = (Win% × Avg Win) – (Loss% × Avg Loss)
Example: You win 40% of trades, with an average R:R of 1:2. Assume risk = 1 unit, reward = 2 units.
Expectancy = (0.4 × 2) – (0.6 × 1) = 0.8 – 0.6 = +0.2 units per trade. Positive!
Even with a 40% win rate, you’re profitable because your wins are twice as large as your losses.
Adjust the sliders to see how risk and reward affect your required win rate.
You identify a support level at 148.00 and resistance at 149.00. You enter at 148.20, stop loss at 147.90 (30 pips), take profit at 149.10 (90 pips). Your R:R is 90/30 = 3 (1:3). You risk $300 on a standard lot to make $900.
If your win rate is just 30%, expectancy = (0.3×3) – (0.7×1) = 0.9 – 0.7 = +0.2 units. Still profitable!
It’s tempting to aim for 1:5 or 1:10, but such trades rarely hit. If your take profit is too far away, your win rate plummets. Find a balance – a realistic 1:2 with a 50% win rate is better than a 1:5 that wins only 10% of the time.