What Is Risk-to-Reward?
The risk-to-reward ratio (R:R) compares how much you stand to lose versus how much you stand to gain on a trade. If your stop-loss is 30 pips and your take-profit is 60 pips, your R:R is 1:2. You're risking 1 unit to potentially gain 2.
This ratio is one of the most important numbers in trading. It determines how often you need to be right to make money.
The Maths Behind It
With a 1:2 risk-to-reward ratio, you only need to win 34% of your trades to break even. Win 40% and you're profitable. With a 1:3 ratio, you only need to win 26% to break even.
Compare that to a 1:1 ratio, where you need to win more than 50% of trades — which is much harder than it sounds when you factor in spreads, slippage, and the psychological pressure of losing streaks.
A favourable R:R ratio gives you a mathematical edge that makes it easier to be profitable even with a modest win rate.
How to Assess R:R Before a Trade
Before entering any trade, identify your stop-loss and take-profit levels on the chart. Then calculate: is the potential reward at least 1.5-2× the risk? If not, the trade may not be worth taking — even if the setup looks good technically.
This is a powerful filter. Many traders improve their results simply by skipping trades where the R:R doesn't meet their minimum threshold.
R:R in Context
A high R:R ratio isn't automatically better. A 1:5 setup where the take-profit requires price to move through major resistance may never be reached. The best R:R is one that's realistic — based on actual market structure, not wishful thinking. Set your targets at levels where price is likely to react, not at arbitrary multiples.
Key Takeaways
- Risk-to-reward compares potential loss to potential gain on every trade
- A 1:2 ratio means you only need to win 34% of trades to break even
- Always calculate R:R before entering — skip trades below your threshold
- Aim for a minimum of 1:1.5, ideally 1:2 or better
- Targets should be realistic — based on market structure, not wishful thinking
