Risk-Reward Ratio: What It Is, and the Win Rate Each Ratio Requires

Three prices, one ratio

The risk-reward ratio is the distance to your target divided by the distance to your stop: (target − entry) ÷ (entry − stop) for a long. Entry 1.0840, stop 1.0790, target 1.0940 gives 0.0100 ÷ 0.0050 = 2.0 — you are risking one unit to pursue two.

The ratio is only as real as its worst input. A target drawn where you would like price to go, or a stop placed where the loss feels acceptable rather than where the idea is invalid, produces a beautiful ratio and a fictional trade.

The breakeven win rate each ratio demands

The ratio and the win rate are two halves of one equation. The win rate at which a ratio breaks even — ignoring costs — is 1 ÷ (1 + ratio):

• 1:1 needs better than 50% of trades to win
• 2:1 needs better than 33.3%
• 3:1 needs better than 25%
• 0.5:1 needs better than 66.7%

Costs shift every breakeven

Fees, spread and slippage are paid whether the trade wins or loses, which moves each breakeven up. A 2:1 trade whose costs consume 10% of the risk unit breaks even near 37%, not 33.3%. On small stops the effect is at its worst, because costs are a fixed bite out of a smaller unit — the reason very tight stops flatter the ratio while quietly ruining its arithmetic.

Expectancy ties it together: (win rate × ratio) − (1 − win rate) − costs, in risk units. A 40% win rate at 2:1 has an expectancy of 0.4 × 2 − 0.6 = +0.2R per trade before costs. Whether that survives your actual costs is a calculation, not a hope.

The ratio does not rank trades on its own

A 3:1 setup whose target sits beyond a level price rarely reaches is worse than a 1.5:1 whose target is conservative. The honest procedure runs in one direction: stop where the idea is invalid, size from the risk budget, target from structure — then read the ratio the trade actually has and let the record, not the aspiration, say what your ratios really average.

Common questions