Orders & execution · Intermediate

Risk-Reward Ratio Explained

The risk-reward ratio does not tell you whether a trade is good. It tells you how often you have to be right before the arithmetic works.

Last reviewed 15 September 2026 by the MarketPro research desk · Editorial policy

In short

The risk-reward ratio compares the distance from entry to stop against the distance from entry to target. A trade risking 50 pips to make 100 is 1:2. Its value is the hurdle it sets: break-even win rate equals risk divided by risk plus reward, so 1:2 needs 33.3%, 1:1 needs 50% and 1:3 needs 25%. The ratio alone proves nothing without the win rate beside it.

What to remember

Break-even win rate is risk divided by risk plus reward. 1:1 needs 50%, 1:2 needs 33.3%, 1:3 needs 25%, 1:0.5 needs 66.7%.
Tightening the stop to improve the ratio buys it with the win rate, and the exchange rate is usually unfavourable.
Costs hit short trades far harder. Two pips takes a 10-pip stop from a 40% break-even to 48%, and a 100-pip stop from 40% to 40.8%.
Risk and reward are not independent. A target beyond about 1.5 times the average daily range describes a trade that rarely completes.

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Fifty pips risked, a hundred targeted, and the 34% it needs

The risk-reward ratio compares what a trade loses if it is wrong against what it makes if it is right. You get it by measuring entry to stop, then entry to target, and putting the two side by side.

Take a long EUR/USD from 1.0800, with the stop at 1.0750 and the target at 1.0900. That is 50 pips of risk against 100 pips of reward, a ratio of 1:2. On a 0.2 lot position, $2 a pip, the trade loses $100 or makes $200.

The number that actually matters follows immediately. For a 1:2 trade to break even you need to win one in three, because two losses of $100 are covered by one win of $200. Precisely, the break-even win rate is risk divided by risk plus reward, or 50 divided by 150, which is 33.3%. Win 34% of the time and you are ahead. Win 32% and you are behind, no matter how attractive the ratio looked.

So the ratio on its own decides nothing. It sets a hurdle, and the strategy either clears it or does not.

The win rate each ratio has to clear

Risk-reward	Break-even win rate	Result at a 45% win rate
1:0.5	66.7%	losing
1:1	50%	losing
1:1.5	40%	profitable
1:2	33.3%	profitable
1:3	25%	profitable
1:5	16.7%	profitable

Read the table in both directions. A method that wins 70% of the time can survive a 1:0.5 ratio, which is how a perfectly sound mean-reversion approach can take profits that look far too small to anyone watching. A method that wins 30% of the time needs better than 1:2.33 before it stops leaking, which is how trend following works: mostly wrong, occasionally very right.

The expectancy arithmetic is the same fact written out. At a 45% win rate and 1:2 on $100 of risk, each trade is worth 0.45 times $200 minus 0.55 times $100, which is plus $35. Drop the win rate to 30% and it becomes 0.30 times $200 minus 0.70 times $100, which is minus $10. The ratio did not change. The trade stopped being worth taking anyway. The profit calculator lets you run this on your own numbers.

Measure it from the stop, not from the entry you wanted

Two habits inflate the ratio on paper without improving anything.

Tightening the stop to make the ratio look better. Moving a stop from 50 pips to 25 turns 1:2 into 1:4 in a spreadsheet and roughly doubles the rate at which ordinary noise closes the trade. You bought the ratio with the win rate, and the table above shows the exchange rate is rarely in your favour.
Quoting it from the price you meant to get. If you planned an entry at 1.0800 and filled at 1.0806, the trade is 56 pips of risk and 94 of reward, or 1:1.68. That is the real trade. Journalling the planned ratio rather than the filled one is how a book of 1:2 trades turns out to have been 1:1.6 all along.

The stop belongs where the idea is wrong, which is a chart question. The target belongs where price is plausibly going. The ratio is what those two answers produce, not an input you get to choose.

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Two pips of cost on a 10-pip stop moves break-even by eight points

The table above ignores costs, and on short-term trades that is a serious omission. You lose the stop plus the spread when wrong, and collect the target minus the spread when right.

A scalp risking 10 pips for 15, with 2 pips of all-in spread and slippage, is really risking 12 to make 13. Break-even goes from 40% to 48%. Eight percentage points is an enormous amount of edge to find, and it has to be found before the strategy earns anything.

Run the same 2 pips through a swing trade risking 100 for 150 and break-even moves from 40% to 40.8%. Identical costs, negligible effect. This is the honest reason short-term trading is harder, and it has nothing to do with skill. Our note on risk management puts the same arithmetic next to position sizing.

The 1:5 target that never gets hit

The largest misuse of the ratio is treating the two numbers as independent. They are not. Push the target further and the probability of reaching it falls, usually faster than the ratio improves.

Take a pair with a 70-pip average daily range. A 250-pip target from a 50-pip stop reads as a beautiful 1:5, and it needs roughly three and a half days of near one-way movement to fill. Most weeks do not contain that. The trade will spend those days drifting back through your entry, and you will either be stopped out on the way or close it manually out of boredom, which is the same outcome with worse record-keeping.

A useful discipline is to check the target against recent range before accepting the ratio. If the distance to target is more than about one and a half times the instrument's average daily range, the ratio is describing a trade that rarely completes. Structure decides this better than arithmetic does: a target just in front of the next significant level usually has both a workable ratio and a realistic chance of being reached.

Grading the ratio afterwards, not only before

The ratio is a planning tool, so most of its value arrives when you compare the plan to the record.

Log planned risk-reward and realised risk-reward on every trade. The gap between them is the single most informative column in a trading journal.
Group by setup. A method that plans 1:3 and realises 1:1.2 because you keep closing early has an execution problem, not a strategy problem.
Compare your actual win rate to the break-even rate the table demands. If it sits below, the arithmetic says the method loses money regardless of how good the individual trades looked.

None of this makes a single trade more likely to work. A well-planned 1:3 setup can go straight to the stop, and frequently does. What the ratio does is tell you, in advance, what your strategy has to be right about often enough for the arithmetic to hold.

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Written and reviewed by the MarketPro research desk

MarketPro is a trading-signal and trading-education app operated by Harajuku Holdings LTD (Cyprus). Our signal desk publishes and tracks every trade idea in-app, and every page here is checked against the app's live behaviour before publishing. Last reviewed 15 September 2026. How we produce signals and content · About MarketPro

FAQ

Risk-Reward Ratio Explained: questions

What is a good risk-reward ratio for trading?

There is no single good ratio, because it only means something next to a win rate. A 1:1 trade needs to win more than half the time; a 1:3 trade needs only one in four. Trend-following methods generally need 1:2 or wider because they are wrong most of the time, while high-accuracy mean-reversion methods can work below 1:1. The test is whether your measured win rate clears the break-even rate the ratio demands.

How do you calculate break-even win rate from risk-reward?

Divide the risk by the sum of risk and reward. A trade risking 50 pips to make 100 gives 50 divided by 150, which is 33.3%, so anything above that is profitable before costs. Add your typical spread and slippage to the risk and subtract it from the reward to get the figure that actually applies to your account, which matters most when stop distances are small.

Does a higher risk-reward ratio mean a better trade?

Not on its own. Pushing a target further improves the ratio on paper while lowering the chance the target is ever reached, and tightening a stop does the same thing from the other side by raising the chance of being closed by ordinary noise. A ratio is only an improvement if the win rate survives it, which is why realised ratios from a journal are more useful than planned ones.

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