The risk-to-reward ratio compares what you stand to lose on a trade with what you stand to gain. It’s one of the simplest numbers in trading — and one of the most misunderstood.
How to calculate it
- Risk = distance from entry to stop loss.
- Reward = distance from entry to take profit.
- Ratio = reward ÷ risk.
A long trade on EUR/USD at 1.0850 with a stop at 1.0830 (20 pips) and a target at 1.0910 (60 pips) has a reward-to-risk of 60 ÷ 20 = 3:1. Traders often describe the reward in multiples of risk: this trade aims for 3R.
Try your own numbers in the risk/reward calculator.
Ratio and win rate are linked
The ratio sets the minimum win rate needed to break even:
| Reward : Risk | Break-even win rate |
|---|---|
| 0.5 : 1 | 66.7% |
| 1 : 1 | 50.0% |
| 2 : 1 | 33.3% |
| 3 : 1 | 25.0% |
But there’s a trade-off: the further away your target, the less often price reaches it. Doubling your target doesn’t keep your win rate the same.
Expectancy is what matters
Expectancy (R) = (Win rate × Average win in R) − (Loss rate × 1R)
| Strategy | Win rate | Avg win | Expectancy |
|---|---|---|---|
| A | 60% | 1R | +0.20R |
| B | 35% | 3R | +0.40R |
| C | 25% | 2.5R | −0.125R |
Strategy C’s 2.5:1 ratio sounds attractive, yet it loses money. Strategy A has a modest 1:1 ratio and still makes money. The ratio means nothing without the win rate.
Examples across markets
| Market | Entry | Stop | Target | Risk | Reward | Ratio |
|---|---|---|---|---|---|---|
| EUR/USD | 1.0850 | 1.0830 | 1.0890 | 20 pips | 40 pips | 1:2 |
| ES futures | 5,400 | 5,392 | 5,416 | 8 points ($400) | 16 points ($800) | 1:2 |
| Stock | $50.00 | $48.50 | $54.50 | $1.50 | $4.50 | 1:3 |
The ratio doesn’t depend on position size — size only changes how many dollars each R is worth. Set the size with the position size calculator.
Costs change the real ratio
Suppose a EUR/USD scalp has a 10-pip stop and a 20-pip target — 1:2 on the chart — and spread plus commission cost 1 pip per round trip. A winner nets 19 pips and a loser costs 11 pips, so the real ratio is about 1:1.7. The smaller the target, the more costs matter.
Track results in R
Recording each trade as a multiple of the amount risked makes results comparable across markets and position sizes. Ten trades from a journal:
| Trade | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
|---|---|---|---|---|---|---|---|---|---|---|
| Result (R) | +2 | −1 | −1 | +2.5 | −1 | +1.5 | −1 | −1 | +3 | −1 |
Four winners and six losers — a 40% win rate — still produce +3R in total, or 0.3R per trade. That is why a lower win rate can be fine when winners are larger than losers.
Common mistakes
- Moving the target closer once the trade is in profit, which quietly lowers the average winner.
- Placing the stop to fit a ratio rather than where the trade idea is wrong.
- Choosing targets beyond realistic levels — a 1:5 ratio means little if price rarely travels that far.
Practical tips
- Set targets from structure, not from a fixed multiple. Then decide if the ratio justifies the trade.
- Include costs. Spreads and commissions shrink reward and enlarge risk, which matters most for small targets.
- Measure your real numbers. Use your journal to calculate actual win rate and average R, not the planned ones.
Frequently asked questions
Is a 1:2 risk-to-reward ratio good?
Risking 1 to make 2 means you break even with a 33.3% win rate before costs. Whether it is good depends on how often your setups actually reach the target.
Should I always aim for a 1:3 ratio?
Not necessarily. Distant targets are hit less often. Choose targets based on market structure, then check that the resulting ratio and your win rate produce positive expectancy.
How do you calculate risk-to-reward on futures?
Measure the stop and target in points, then multiply by the contract's value per point. On ES, an 8-point stop is $400 and a 16-point target is $800 per contract — a 1:2 ratio. The ratio is the same whether you trade ES or the micro MES.
Should trading costs be included in the risk-to-reward ratio?
Yes. Spread and commission make every winner smaller and every loser larger. On short-term trades with small targets, the ratio after costs can be noticeably worse than it looks on the chart.