The risk-reward ratio (R:R) compares what you stand to lose on a trade with what you aim to make. If you risk $500 to target $1,000, the ratio is 1:2. On its own the ratio says little; it becomes useful next to your win rate, because together they decide whether a method makes or loses money over many trades.
The link between the two is the break-even win rate: Break-even win rate = 1 ÷ (1 + R:R). At 1:2 you need to win just over a third of your trades to break even, before costs.
This guide covers how to calculate the ratio, the break-even table, why a big ratio is not automatically better, and how partial profits and moving stops change the math. All prices are illustrative.
How to calculate the risk-reward ratio
For a buy, risk is entry minus stop and reward is target minus entry. For a sell, flip them. Then divide reward by risk:
R:R = (Target − Entry) ÷ (Entry − Stop)
This guide writes the ratio risk first, so 1:2 means you risk 1 to make 2. Some traders write it the other way round, as 2:1, or simply say "2R". The math is the same.
For example:
- EUR/USD: buy at 1.0850, stop at 1.0825 (25 pips), target at 1.0900 (50 pips). 50 ÷ 25 = 2, so 1:2.
- Gold (XAU/USD): sell at $2,400, stop at $2,410 ($10), target at $2,375 ($25). 25 ÷ 10 = 2.5, so 1:2.5.
- Bitcoin (BTC/USD): buy at $65,000, stop at $63,800 ($1,200), target at $68,600 ($3,600). 3,600 ÷ 1,200 = 3, so 1:3.
The ratio does not depend on position size. Size only sets how many dollars 1R is worth; see position sizing.
The break-even win rate
The break-even win rate is the share of trades you must win so that wins and losses cancel out:
Break-even win rate = 1 ÷ (1 + R:R)
| Risk-reward | Break-even win rate |
|---|---|
| 1:0.5 | 66.7% |
| 1:1 | 50% |
| 1:1.5 | 40% |
| 1:2 | 33.3% |
| 1:2.5 | 28.6% |
| 1:3 | 25% |
| 1:4 | 20% |
You can check 1:2 with three trades: one win of +2R and two losses of −1R each add up to zero. Win more than one trade in three at 1:2 and the method is positive before costs; win fewer and it loses.
Costs move the break-even point up. The spread, commissions and slippage make each win slightly smaller and each loss slightly bigger, so your real break-even win rate sits a little above the table.
Why a high R:R alone is not enough
It is tempting to think a 1:5 trade is always better than a 1:1 trade. It is not, because the further away your target is, the less likely price is to reach it before your stop.
Picture a market with no edge, where price moves at random. There, the chance of hitting the target before the stop is roughly the stop distance divided by the stop plus target distance. For a 25-pip stop and a 50-pip target, that is 25 ÷ 75 = 33.3%, exactly the break-even win rate for 1:2. Stretch the target to 125 pips and the chance falls to 25 ÷ 150 = 16.7%, again exactly break-even for 1:5.
So changing the ratio on its own only trades win rate for payoff. A real edge has to come from the setup: where you enter, why, and whether the target is somewhere price has a reason to go. The ratio you can use is the one the chart supports.
Win rate plus R:R: expectancy
Win rate and R:R combine into expectancy, the average result per trade over many trades. The general formula, explained in how to measure risk, is Expectancy = (Win rate × Average win) − (Loss rate × Average loss). Measured in R, with every loss equal to 1R, it becomes:
Expectancy in R = (Win rate × R:R) − Loss rate
| Win rate | At 1:1 | At 1:2 | At 1:3 |
|---|---|---|---|
| 30% | −0.4R | −0.1R | +0.2R |
| 40% | −0.2R | +0.2R | +0.6R |
| 50% | 0.0R | +0.5R | +1.0R |
| 60% | +0.2R | +0.8R | +1.4R |
These figures illustrate the math only. They are not typical results, and in practice win rates fall as targets move further away.
For example, at a 40% win rate and 1:2, over 50 trades you would expect about 20 wins of +2R (+40R) and 30 losses of −1R (−30R). The net is +10R, or +0.2R per trade, before costs. Whether that holds for you depends on your recorded results, not on a planned ratio.
Your actual average win is usually smaller than the planned target, because of early exits, partial profits and slippage. Use the average win and loss from your trading journal, not the ratio you aimed for.
Partial profits and moving stops
Two common trade-management techniques change your real R:R: closing part of the position early, and moving the stop.
Partial profits
Taking partial profits means closing part of the position at a first target and letting the rest run. It smooths your results and can make a plan easier to follow, but it lowers your average win, because only part of the position reaches the final target.
Moving the stop to break-even
Moving your stop to your entry price once the trade is in profit removes the planned loss on that trade, apart from gaps and slippage. The cost is that normal pullbacks close more trades at zero that would have gone on to reach the target.
Here is a trade with a 1R first target and a 3R final target, managed three ways:
| Plan | Price runs straight to 3R | Price hits 1R, then the original stop | Price hits 1R, dips to entry, then reaches 3R |
|---|---|---|---|
| Hold full size, stop unchanged | +3R | −1R | +3R |
| Close half at 1R, stop unchanged | +2R | 0R | +2R |
| Close half at 1R, stop moved to entry | +2R | +0.5R | +0.5R |
No plan is right or wrong. Partial exits and break-even stops trade a smaller average win for fewer full losses. What matters is that you test the rule, apply it consistently and measure the result in R. One rule holds in every case: move a stop only to reduce risk, never further away.
Setting realistic targets from structure
A target should sit where price has a reason to stop, not at whatever distance produces a neat ratio.
- Place the stop first, beyond the level that proves the idea wrong.
- Find the next obstacle in the direction of the trade: resistance for a buy, support for a sell, or a recent swing high or low.
- Set the target just before that obstacle, since price often turns before reaching it exactly.
- Measure the ratio. If it falls short of your minimum, skip the trade rather than stretching the target.
For example, you consider buying EUR/USD at 1.0850 with a stop at 1.0828, below a swing low: a 22-pip stop. The next resistance is at 1.0895, 45 pips away. A target just before it, at 1.0892, is 42 pips away, so the ratio is 42 ÷ 22 = 1.9, about 1:1.9. A 1:3 target at 1.0916 would sit beyond resistance and need price to break through first. Support and resistance shows how to find those levels.
Also compare the distance with how far the instrument usually moves in the time you plan to hold the trade. A target that needs several days' worth of movement in a single session is unlikely to be reached.
Common mistakes
- Choosing the ratio before reading the chart. A fixed 1:3 on every trade puts targets in arbitrary places. Let structure set the target, then check the ratio.
- Judging a method by R:R or win rate alone. Neither tells you whether a method works. Combine them into expectancy.
- Using planned R:R instead of actual R:R. Early exits shrink your real average win. Measure what you actually got.
- Ignoring costs. Spread and slippage raise the break-even win rate, especially with tight stops. Include them when you calculate.
- Moving the stop further away to avoid a loss. This turns a 1R loss into a bigger one and breaks every number above. Only tighten stops.
Key takeaways
- R:R compares the distance to your target with the distance to your stop; 1:2 means you aim to make twice what you risk.
Break-even win rate = 1 ÷ (1 + R:R): 50% at 1:1, 40% at 1:1.5, 33.3% at 1:2, 25% at 1:3.- A higher ratio lowers the win rate you need, but also the chance of reaching the target. The ratio alone is not an edge.
- Expectancy combines win rate and R:R; judge a method by it, over many recorded trades.
- Partial profits and break-even stops trade average win for fewer full losses. Test them, measure them in R, and never widen a stop.
Frequently asked questions
What is a good risk-reward ratio?
There is no single good ratio, only a good combination of ratio and win rate. A 1:1 method that wins 60% of the time and a 1:3 method that wins 35% of the time both have positive expectancy before costs. Many traders look for at least 1:1.5 to 1:2, but only when the chart supports that target.
How do you calculate the risk-reward ratio?
Divide the distance from entry to target by the distance from entry to stop. A buy at 1.0850 with a stop at 1.0825 (25 pips) and a target at 1.0900 (50 pips) gives 50 ÷ 25 = 2, written 1:2.
Can you be profitable with a 30% win rate?
The math allows it if your average win is large enough. At a 30% win rate the break-even ratio is 1 ÷ 0.30 − 1, about 1:2.33, so your average win must be more than 2.33 times your average loss, after costs, for the method to come out ahead. That requires targets the market can realistically reach.
Is a high win rate or a high R:R better?
Neither is better on its own; expectancy is what counts. High win rate methods usually have smaller wins, while high R:R methods accept more losing trades and longer losing streaks. The right balance is the one you can follow consistently and measure honestly.