Risk-to-Reward Ratio in Trading: A Practical Guide
Risk-reward ratio compares planned profit to planned loss. It helps structure trades but does not guarantee profitability on its own.
Risk-reward ratio compares planned profit on a trade to planned loss — usually measured from entry to take-profit versus entry to stop-loss. It helps structure decisions but does not replace edge or expectancy.
Measure setups with the risk/reward calculator after defining entry, stop, and target prices.
How to express risk-reward
A 1:2 risk-reward means you target twice the distance (in price or pips) that you risk to stop. A 1:1 setup risks and targets equal distance.
Examples (illustrative)
1:1
Entry 1.1000, stop 1.0950 (−50 pips), target 1.1050 (+50 pips). You need win rate above breakeven after costs to sustain — costs matter.
1:2
Same stop at 1.0950, target 1.1100 (+100 pips). Each win covers two losses before costs — but higher targets may hit less often.
1:3
Target 1.1150 (+150 pips) with the same 50-pip stop. Lower hit rate can still work if expectancy is positive — there is no free lunch.
Expectancy caveat
Attractive risk-reward on chart does not guarantee positive expectancy after win rate, slippage, and fees.
Track outcomes in a journal. Review during calmer session hours rather than only after volatile NFP weeks.
Link R:R to position size
Fix dollar risk first via position sizing. R:R then describes geometry of stop and target — not account risk percent.
Key takeaways
Define stop and target before entry when possible.
Higher R:R often implies lower hit rate — model both.
Spread and slippage reduce effective reward.
Use the calculator for consistency.
Risks and common mistakes
Moving targets farther after entry to 'improve' R:R on paper.
Using tight stops solely to inflate R:R without respecting structure.
Ignoring psychological impact of long losing streaks at 1:3 targets.