What it is
The risk-reward ratio compares what you stand to lose with what you hope to gain on one trade. Risk is the distance from your entry to your stop loss. Reward is the distance from your entry to your take profit. If you risk 50 pips to make 100, the ratio is 1:2.
Why it matters
The ratio decides how often you need to be right. If your winners are twice the size of your losers, you only need to win about one trade in three to break even. If your winners and losers are the same size, you need to win more than half.
That is why a trader with a modest win rate can still make money, and a trader who wins often can still lose. The calculator also shows the break-even win rate, which is 100 / (1 + ratio).
Why traders use it
Traders use it before entering, to check that a setup pays enough for the risk. A trade that risks 40 pips to make 20 pips has to be very likely to work to be worth taking, and checking the numbers first helps you skip trades like that.
How important is it?
It is a very useful filter, but it is not enough on its own. A target that is very far away looks great on paper at 1:5, but if price rarely gets there, the high ratio means little. A good ratio also does not fix a bad setup. Use it together with your own judgment of how likely the trade is to work.
Worked example
With the defaults, you buy at 1.1000 with a stop loss at 1.0950 and a take profit at 1.1100. Your risk is 0.0050 (50 pips) and your reward is 0.0100 (100 pips). The ratio is 1:2, and you need to win about 33.3% of such trades to break even.
If you only find 1:1 setups, the break-even win rate rises to 50%. After the spread is taken into account, you need a bit more than that.
Common mistakes
- Placing the target at an arbitrary distance just to make the ratio look good. Targets should come from the chart, not from the ratio you want.
- Ignoring the spread and commissions, which make the real risk a little larger and the real reward a little smaller.
- Moving the stop loss further away after entering. That changes the ratio you planned and increases the loss.
- Judging a trade by the ratio alone, without thinking about how likely the target is to be reached.
- Mixing up the direction. For a sell trade the stop loss is above the entry and the take profit is below.
Frequently asked questions
What is a good risk-reward ratio?
It depends on your win rate. Many traders look for at least 1:1.5 or 1:2, but a strategy with a high win rate can work with a lower ratio. The right ratio is the one that, with your real win rate, leaves you with a profit after costs.
What does break-even win rate mean?
It is the share of trades you must win so that your total gains equal your total losses, before costs. At 1:2 it is 33.3%, at 1:3 it is 25%.
What is an R-multiple in trading?
R stands for your initial risk per trade. If you risk $50 (1R) and make $150, you made a 3R profit (a 1:3 risk-reward ratio).
Is a higher ratio always better?
No. A higher ratio usually means a more distant target, and distant targets are reached less often. What matters is the ratio together with how often it actually works.
Related trading guides
Risk-Reward Ratio Explained With Examples
Understand the risk-reward ratio, the win rate you need to break even, and why a good ratio alone does not make a good trade.
How to Calculate Position Size, Step by Step
A simple four-step method to work out your lot size from your account balance, risk percentage and stop loss, with worked examples.
What Is Drawdown and Why Recovery Gets Harder
See how a trading drawdown is measured, why the gain needed to recover grows faster than the loss, and how to limit deep drawdowns.
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