Risk-reward ratio
The size of a planned win against the size of the planned loss - the ratio that sets break-even win rate.
The size of a planned win against the size of the planned loss - the ratio that sets break-even win rate.
Risk-reward compares what a trade stands to gain with what it stands to lose: risking $1 to make $3 is a 1:3 ratio. Its real use is arithmetic - at 1:3 you only need to win a quarter of the time to break even, before costs, while a 1:1 system needs half. The ratio is fixed at entry by where the stop and target sit; win rate is what the market delivers afterwards. Expectancy combines the two, and only the combination decides whether a system makes money.
A ratio is only honest if both distances are places you would actually exit. Targets copied from a chart pattern you do not believe in, or stops widened because the position felt too big, silently rewrite the ratio after the trade is on. Set the ratio before entry, size the lot from the stop distance, and let the win rate take care of itself.
Worked example
A trade risks 20 pips to chase 60: 1:3. Winning a third of the time yields (20 × 0) + (60 × 1) minus (20 × 2) = flat before spread; the same hit rate at 1:1 loses money. The chart was the same - the ratio did the work.
Related terms and tools
Drawdown, Kelly Criterion Calculator, Risk of Ruin Calculator
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