Risk/reward is one of the first concepts every trader hears about — and one of the most frequently misapplied. On its own, the ratio tells you very little. Paired with your win rate, it becomes the foundation of whether a strategy actually makes money.
The short answer
The risk/reward ratio compares how much you stand to lose on a trade (the risk) with how much you aim to gain (the reward). If you risk 20 pips to your stop loss and target 40 pips of profit, your risk/reward is 1:2 — you're risking one unit to potentially make two.
How to calculate it
The calculation is simple:
- Risk = distance from entry to your stop loss
- Reward = distance from entry to your target
- Ratio = reward ÷ risk
Our Risk / Reward Calculator does this instantly and lets you test different stop and target placements before you commit.
Why the ratio is meaningless alone
Here's the trap: a 1:3 risk/reward sounds great, but if you only hit that target 1 time in 5, you're losing money. Conversely, a 1:1 ratio can be highly profitable at a 65% win rate. The ratio and the win rate are two halves of the same equation — judge them together, never in isolation.
Expectancy: the number that actually matters
Expectancy combines both into the average result per trade:
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)
A positive expectancy means the strategy makes money over a large sample. This is why professional traders think in terms of expectancy across hundreds of trades, not the outcome of any single one. A losing trade with good risk/reward and positive expectancy was still a correct decision.
A practical example
Say your strategy wins 40% of the time with a 1:2 risk/reward. Over 100 trades risking $100 each:
- 40 wins × $200 = $8,000
- 60 losses × $100 = −$6,000
- Net = +$2,000 (positive expectancy)
Now the same 40% win rate at 1:1 risk/reward:
- 40 wins × $100 = $4,000
- 60 losses × $100 = −$6,000
- Net = −$2,000 (negative expectancy)
Same win rate, opposite outcome — because of risk/reward.
How risk/reward connects to sizing and survival
Risk/reward shapes your edge; position sizing keeps you alive long enough to realise it. Even a strong, positive-expectancy strategy has losing streaks, so risk a small fixed percentage per trade and let the expectancy play out. The Risk Management Basics guide ties these ideas together.
Risk disclaimer: This article is educational content only and is not financial advice. A favourable risk/reward ratio does not guarantee profits. Trading involves significant risk of loss. Past performance does not guarantee future results. You are responsible for your own decisions.
Frequently asked questions
What is a good risk/reward ratio?
There is no universally good ratio — it only means something alongside your win rate. A 1:2 risk/reward can be profitable at a modest win rate, while a 1:1 needs a higher win rate. What matters is positive expectancy across many trades.
How do I calculate risk/reward?
Divide the distance from your entry to your target (reward) by the distance from your entry to your stop loss (risk). If you risk 20 pips to make 40, that's a 1:2 risk/reward ratio.
Is a higher risk/reward always better?
Not necessarily. Very high reward targets are often hit less frequently, lowering your win rate. The best ratio is the one that maximises expectancy for your actual strategy, not the biggest number.
What is expectancy?
Expectancy is the average outcome per trade across many trades, combining win rate and risk/reward. A positive expectancy means the strategy makes money over a large sample, even if individual trades lose.