Risk/reward ratio is one of the most cited concepts in trading — and one of the most misunderstood. It's not about taking high R:R trades blindly. It's about understanding the relationship between your R:R and your win rate, and only taking trades where the maths is in your favour.
What Is Risk/Reward Ratio?
The risk/reward ratio (R:R) compares how much you stand to lose on a trade (risk) to how much you stand to gain (reward). It's expressed as a ratio like 1:2 or 1:3.
- 1:1 R:R — You risk $100 to make $100
- 1:2 R:R — You risk $100 to make $200
- 1:3 R:R — You risk $100 to make $300
How to Calculate It
Formula
Reward = |Take profit − Entry price|
Risk = |Entry price − Stop loss|
R:R = Reward ÷ Risk
Example — ES Long Trade
R:R and Win Rate — The Crucial Connection
Your R:R ratio determines the minimum win rate you need to be profitable. If you take trades with a poor R:R, you need to win the majority just to break even.
| R:R Ratio | Breakeven Win Rate | Note |
|---|---|---|
| 1:0.5 | 67% | Need to win 2 out of 3 just to break even |
| 1:1 | 50% | Flip of a coin breaks even |
| 1:1.5 | 40% | Win less than half and still profit |
| 1:2 | 33% | Win 1 in 3 and break even |
| 1:3 | 25% | Win 1 in 4 and break even |
This is why high R:R trades are so valuable — a 1:3 R:R strategy only needs to win 25% of the time to be profitable. That's achievable even with a mediocre strategy. Use the Risk/Reward Calculator to see your breakeven win rate for any setup.
What R:R Should You Target?
There's no universal answer — it depends on your strategy and win rate. But here are practical guidelines for funded traders:
- Minimum 1:1.5 — anything below this is very difficult to sustain profitably
- 1:2 target — standard for most swing and day traders
- 1:3+ — ideal, but don't force it if the market structure doesn't support it
Don't Chase R:R at the Expense of Quality
Moving your take profit further to improve your stated R:R doesn't help if it means your target is in a zone the price rarely reaches. A realistic 1:2 trade beats a theoretical 1:4 trade where the target is never hit.
Combine R:R With Your Win Rate
Your true edge comes from the combination of your R:R and your win rate — this is called expectancy. Use the Win Rate Calculator to check whether your strategy has a positive expectancy given your typical R:R and win rate. If expectancy is positive, the strategy is profitable over time. If it's negative, no amount of discipline will save you.