Risk/reward ratios and why they determine long-term profitability
The risk/reward ratio (R:R) of a trade describes how much you stand to gain relative to how much you stand to lose. A 1:2 risk/reward ratio means you risk £100 to potentially make £200. Over many trades, the R:R ratio — combined with your win rate — determines whether a trading strategy is profitable or not. This is the foundation of trading edge, and it is why prop firms look for consistent traders rather than lucky ones.
The break-even win rate for any R:R ratio
Every risk/reward ratio has a break-even win rate — the minimum percentage of trades you need to win just to not lose money over time. The formula is: Break-even win rate = 1 ÷ (1 + R:R ratio).
- 1:1 R:R → 50% win rate required to break even
- 1:2 R:R → 33.3% win rate required to break even
- 1:3 R:R → 25% win rate required to break even
- 2:1 R:R → 66.7% win rate required to break even
A strategy with a 1:3 R:R can be profitable even if you lose 75% of your trades — as long as your winners are consistently 3× your losers. Many traders assume a high win rate is essential. In reality, a lower win rate with a high R:R can be extremely profitable and far less psychologically demanding than chasing a high win rate with a low R:R.
Expected value: the true measure of strategy quality
Expected value (EV) is the average profit or loss you can expect per trade, calculated as: EV = (Win Rate × Average Win) − (Loss Rate × Average Loss). A positive EV means the strategy is profitable over many trades; a negative EV means it will lose money regardless of short-term results.
For example, a strategy with a 40% win rate, an average win of $300, and an average loss of $100 has an EV of: (0.40 × $300) − (0.60 × $100) = $120 − $60 = $60 per trade. This strategy generates an average of $60 of profit per trade. Over 100 trades, that is $6,000 in expected profit — even though 60% of trades are losers.
Why prop traders need consistent R:R ratios
On a prop firm account with strict drawdown rules, consistency of R:R is as important as the ratio itself. A strategy that sometimes targets 3R and sometimes targets 0.5R (because you moved your target) will produce erratic results that are difficult to manage within a fixed drawdown budget. Decide your R:R before entering a trade, set your take profit at that level, and let the trade play out without intervention.
Moving your take profit closer because you “feel” the market might reverse is one of the most common ways traders undermine a profitable strategy. If your strategy has a 1:2 R:R but you consistently close at 1:1 due to fear, your actual R:R — and therefore your break-even win rate requirement — is completely different from what you think it is.
R:R and the prop firm challenge
When planning a prop firm challenge, your R:R ratio determines how many trades you need to hit the profit target without exceeding the drawdown limit. A higher R:R means fewer trades are needed to generate the required profit, which means fewer opportunities for a losing streak to derail the challenge. Many experienced funded traders prefer strategies with R:R of 1:2 or higher specifically because they require less trading activity — and less trading activity means fewer opportunities to breach the rules.
This calculator is for educational purposes only. Past risk/reward ratios do not guarantee future performance.