Risk-Reward Ratio

What is Risk-Reward Ratio?

Risk-reward ratio (R:R) compares the potential loss of a trade to its potential profit. A 1:2 R:R means you're risking $1 to make $2. If your stop loss is 30 pips and your take profit is 60 pips, that's a 1:2 risk-reward ratio.

R:R is critical because it determines what win rate you need to be profitable. With 1:1 R:R, you need to win more than 50% of trades. With 1:3 R:R, you only need to win 25% to break even. Higher R:R ratios give you a larger margin for error.

R:R and Win Rate Together

• 1:1 R:R — Need >50% win rate to profit (breakeven at 50%)
• 1:2 R:R — Need >33% win rate to profit (breakeven at 33%)
• 1:3 R:R — Need >25% win rate to profit (breakeven at 25%)

The Trap of Chasing High R:R

A common mistake is pursuing very high R:R (1:5+) at the expense of win rate. If your target is so far away that you rarely hit it, a theoretical 1:5 R:R with a 10% win rate is actually a losing strategy. The sweet spot for most day traders is 1:1.5 to 1:3, with a win rate above 40%.