The risk-reward ratio is the single number that tells you how much you stand to gain versus how much you are risking on a trade. It is simple to calculate and easy to quote, but most traders use it wrong because they judge a ratio in isolation. A 3:1 trade is not automatically "better" than a 1:1 trade. What matters is whether your ratio and your win rate, combined, produce a positive expectancy.
This guide covers how to calculate the risk-reward ratio, the formula that links any ratio to the win rate you need to break even, and how the two numbers multiply into the only figure that decides whether a strategy makes money over time.
What Is the Risk-Reward Ratio?
The risk-reward ratio (R:R) compares the amount you are risking on a trade to the amount you expect to make if the trade works. It is expressed as risk-to-reward — for example 1:3 means you are risking 1 unit to potentially make 3.
The "unit" is the distance from your entry to your stop, measured in price. The reward is the distance from your entry to your target. Both legs are defined before you enter, which is the whole point: the ratio forces you to know your exit before your emotions get involved.
Throughout this article we use R to mean the reward expressed in multiples of risk. A 2:1 trade has R = 2. A 1:1 trade has R = 1. Your risk is always 1R by definition — it is the yardstick everything else is measured against.
How to Calculate the Risk-Reward Ratio
The formula is straightforward:
Risk-reward ratio = (Entry − Stop) : (Target − Entry)
for a long trade, and the reverse distances for a short. To turn it into a single R value, divide the reward distance by the risk distance:
R = Reward distance ÷ Risk distance
Worked example
Say you are long EUR/USD (these levels are illustrative, not a live call):
| Parameter | Value |
|---|---|
| Entry | 1.0850 |
| Stop-loss | 1.0830 |
| Target | 1.0910 |
| Risk distance | 1.0850 − 1.0830 = 20 pips |
| Reward distance | 1.0910 − 1.0850 = 60 pips |
| R (reward ÷ risk) | 60 ÷ 20 = 3 |
| Risk-reward ratio | 1:3 |
So you are risking 20 pips to make 60 — a 1:3 setup, or R = 3. The ratio is dimensionless, so it holds whether you measure in pips, points, ticks, or dollars. You can check any setup quickly with our risk-reward ratio calculator.
The Number That Actually Matters: Break-Even Win Rate
Here is the part most traders skip. A risk-reward ratio means nothing until you pair it with the win rate it requires. Every ratio has a break-even win rate — the exact percentage of trades you must win just to come out flat, before costs.
The formula is clean:
Break-even win rate = 1 ÷ (1 + R)
where R is your reward expressed in multiples of risk. The bigger your R, the lower the win rate you can afford and still stay profitable. This is why a high R:R is forgiving: you can be wrong more often and still make money.
The break-even win rate table
| Risk-reward (R:R) | R value | Break-even win rate = 1 ÷ (1 + R) |
|---|---|---|
| 1:1 | 1 | 1 ÷ 2 = 50% |
| 1.5:1 | 1.5 | 1 ÷ 2.5 = 40% |
| 2:1 | 2 | 1 ÷ 3 = 33.3% |
| 3:1 | 3 | 1 ÷ 4 = 25% |
| 4:1 | 4 | 1 ÷ 5 = 20% |
Read it the right way: at 1:3, you only need to win 1 in 4 trades to break even. Win more than 25% of the time and the strategy is profitable over a large enough sample. At 1:1, you need a coin-flip 50% just to tread water, which leaves no margin once spread and commission are subtracted.
This also explains why "what is a good risk-reward ratio" has no fixed answer. A good ratio is one whose break-even win rate sits comfortably below the win rate you can actually achieve with your strategy. A scalper who genuinely wins 65% of trades can run a 1:1 and still profit. A swing trader who wins 35% needs at least 2:1 to survive.
R:R + Win Rate = Expectancy
The break-even win rate tells you the threshold. Expectancy tells you how much you actually make, on average, per trade. It is the number that decides everything, and it combines both inputs:
Expectancy = (Win rate × Avg win) − (Loss rate × Avg loss)
Expressed in R, where the average win is R and the average loss is 1R:
Expectancy (in R) = (Win rate × R) − (Loss rate × 1)
A positive expectancy means the strategy makes money over time. Zero means break-even. Negative means you lose, no matter how good any single trade felt.
Worked expectancy example
Say you trade a 2:1 setup (R = 2) and win 45% of the time, risking a fixed $100 per trade. So a winner returns +$200 and a loser costs −$100.
- Wins: 0.45 × $200 = +$90
- Losses: 0.55 × $100 = −$55
- Expectancy per trade = $90 − $55 = +$35
In R terms: (0.45 × 2) − (0.55 × 1) = 0.90 − 0.55 = +0.35R per trade.
Over 100 trades, that is roughly +$3,500 before costs — from a strategy that loses more often than it wins. The 2:1 ratio carries the math: the break-even win rate at R = 2 is 33.3%, and 45% sits comfortably above it.
The counter-intuitive case
Now flip it. Say you have a high win rate but a poor ratio — you win 70% of the time, but your reward is only half your risk (R = 0.5 — risking $100 to make $50). A winner makes +$50, a loser costs −$100.
- Wins: 0.70 × $50 = +$35
- Losses: 0.30 × $100 = −$30
- Expectancy per trade = $35 − $30 = +$5
Still positive, but barely — and one bad losing streak or a few extra pips of spread can flip it negative. The break-even win rate at R = 0.5 is 1 ÷ 1.5 = 66.7%, so a 70% win rate leaves almost no cushion. This is the trap of "I win most of my trades": a high hit rate with a small reward is fragile, while a modest hit rate with a large reward is robust.
Comparing Two Strategies on Expectancy, Not Vibes
This is where expectancy earns its keep. Two traders can describe their systems in ways that sound completely different, yet land in the same place:
| Trader A (trend) | Trader B (scalp) | |
|---|---|---|
| Risk-reward | 1:3 (R = 3) | 1:1 (R = 1) |
| Win rate | 35% | 55% |
| Break-even win rate | 25% | 50% |
| Margin over break-even | +10 pts | +5 pts |
| Expectancy (in R) | (0.35×3) − (0.65×1) = +0.40R | (0.55×1) − (0.45×1) = +0.10R |
Trader A wins barely a third of the time and still has four times the per-trade edge of Trader B, who wins more often than not. Neither approach is "right" — both are profitable — but you cannot tell which is stronger by win rate alone, or by ratio alone. You need both, run through expectancy.
How to Use This When You Trade
The practical workflow is short:
- Define risk and reward before entering. Mark your stop and target, then compute R. If you cannot state your R before the trade, you do not have a plan, you have a hope.
- Check the break-even win rate. Use 1 ÷ (1 + R) to see what hit rate the setup demands. If your historical win rate for that setup is below the break-even threshold, skip it.
- Size the position to a fixed risk. The ratio is independent of size, but expectancy in dollars is not. Risk the same small percentage (commonly 1–2%) of your account on every trade so one loss never does real damage. Translate "1% on a 20-pip stop" into an exact lot size with the position size calculator.
- Judge the strategy on expectancy, over a sample. A single trade tells you nothing. Fifty to a hundred tell you whether your real win rate clears your break-even win rate.
A minimum R:R rule comes out of this naturally. If the nearest sensible target does not offer a reward worth your risk — given the win rate you realistically hit — the setup is a pass, however clean it looks. This is exactly the filter we apply in the worked trade in our guide on how to trade fair value gaps.
Why Most Traders Get the Ratio Wrong
- Quoting R:R with no win rate. "I only take 3:1 trades" means nothing if you win 10% of them. 3:1 needs 25% just to break even.
- Inflating the target to hit a nice ratio. Setting a 1:5 target at a level price will never reach does not give you a 1:5 trade — it gives you a 1:1 loss when the stop fills. The reward leg has to be a real, reachable level.
- Moving the stop to "save" a ratio. Widening your stop after entry shrinks R and quietly raises the win rate you need. The stop is your invalidation, not a slider.
- Ignoring costs. Spread and commission eat into every reward leg. A 1:1 that looks break-even at 50% is actually losing once costs are netted out — another reason thin ratios are fragile.
Tracking Your R:R and Win Rate
You cannot calculate expectancy from memory. The break-even formula only helps if you know your actual win rate for each setup, and that requires data. Logging every trade in a trading journal — entry, stop, target, planned R, and the outcome — lets you compute your real win rate per setup and compare it against the break-even win rate the ratio demands.
After fifty to a hundred tagged trades you will see, in numbers, which of your setups clear their break-even threshold and which only feel like they do. That comparison — realised win rate versus required win rate — is the difference between a strategy you believe in and one you can prove.
FAQ
How do you calculate the risk-reward ratio?
Divide the reward distance by the risk distance. The risk distance is from your entry to your stop; the reward distance is from your entry to your target. If you risk 20 pips to make 60 pips, that is 60 ÷ 20 = 3, a 1:3 ratio (R = 3). The ratio is unitless, so it works the same in pips, points, ticks, or dollars.
What is a good risk-reward ratio?
There is no universal "good" ratio, because it depends on your win rate. A good ratio is one whose break-even win rate — calculated as 1 ÷ (1 + R) — sits below the win rate you can actually achieve. A trader who wins 60% can profit at 1:1; a trader who wins 35% needs at least 2:1. Judge the ratio together with your win rate, never alone.
What is the break-even win rate for a 2:1 risk-reward?
For a 2:1 ratio, R = 2, so the break-even win rate is 1 ÷ (1 + 2) = 1 ÷ 3 = 33.3%. You need to win more than one in three of those trades to be profitable before costs. For 3:1 it drops to 25%, and for 1:1 it rises to 50%.
Does a higher risk-reward ratio always make a strategy better?
No. A higher ratio lowers the win rate you need, but only if your reward target is a level price can realistically reach. Stretching the target to a price that rarely fills inflates the ratio on paper while your stops keep getting hit. What makes a strategy better is positive expectancy — the right combination of ratio and win rate — not a large ratio by itself.
How does risk-reward relate to expectancy?
Expectancy = (win rate × average win) − (loss rate × average loss). The risk-reward ratio sets the size of the average win relative to the average loss, and the win rate sets how often each occurs. A positive expectancy means the strategy makes money over a large sample; the ratio and the win rate are the two inputs that produce it.
About the author. Artem Gasparyan is an experienced trader and the founder of GASPNTRADER, a free trading journal built to help traders measure risk, win rate, and expectancy across their setups. The concepts above are standard risk-management practice and are educational, not financial advice.
