Risk-Reward Ratio: The Math of Profitable Trading
The risk-reward ratio measures how much you risk versus how much you stand to gain, and it determines the win rate you need to break even.
Risk-Reward Ratio: The Math of Profitable Trading
A 90% win rate with bad risk-reward loses money. A 35% win rate with great risk-reward can make you wealthy.
If you've ever wondered why a strategy that "wins most of the time" still drains your account, the answer is the risk-reward ratio (RR).
What is risk-reward?
RR compares your potential loss to your potential gain on a trade:
RR = (Target − Entry) ÷ (Entry − Stop)
Example: Entry $50, stop $48, target $56.
- Risk = $50 − $48 = $2
- Reward = $56 − $50 = $6
- RR = 6 ÷ 2 = 3 → written as "1:3"
For every $1 you risk, you make $3 if the trade works.
The breakeven win rate
Every RR has a breakeven win rate — the minimum win rate needed to not lose money over time:
Breakeven win rate = 1 ÷ (1 + RR) × 100
| RR | Breakeven win rate |
|---|---|
| 1:1 | 50.0% |
| 1:2 | 33.3% |
| 1:3 | 25.0% |
| 1:5 | 16.7% |
With a 1:3 RR you can be wrong 75% of the time and still break even. With 1:1 you must be right more than half the time — and after fees, that's hard.
Why RR ≥ 2 is the practical target
- Forgives mistakes: You can be wrong often and still profit
- Psychological edge: A high-RR strategy absorbs losing streaks without breaking you emotionally
- Forces discipline: Targets are far from entry, so you can't exit early on a whim
- Absorbs costs: Spread, commission, and slippage eat a bigger share of low-RR trades
The classic beginner trap
Cutting winners and letting losers run:
- Trade goes against you → you hold, hoping it recovers
- Trade goes your way → you exit early, "locking in" a tiny profit
A 1:3 strategy executed this way becomes a 1:0.5 strategy — guaranteed to lose money.
Fix: Set your stop and target before entering, then walk away. Let the trade hit one or the other.
How to use RR in practice
- Calculate RR with the position size calculator before every entry
- Reject any trade with RR < 1.5
- Prefer RR ≥ 2
- Track your actual win rate vs breakeven in a journal
- If your real win rate is below breakeven, your strategy or execution has a problem — fix it before sizing up
Advanced: realizing RR
The RR you plan is not the RR you realize. Realized RR is:
Realized RR = (Sum of wins) ÷ (Sum of losses)
Compare planned vs. realized RR over 50 trades. If planned is 1:3 but realized is 1:1.2, your exits are leaking edge. Common causes: exiting winners early, widening stops on losers, or moving targets mid-trade.
Summary
RR is the single most important number you can compute before entering a trade. It tells you the win rate you need and whether the trade is worth taking at all. Stop obsessing over win rate — start obsessing over risk-reward.