The risk-reward ratio compares what you can make on a trade with what you risk. Risk one unit to make two and your ratio is 1:2. A higher ratio lets you win less often and still profit. A 1:2 ratio only needs to win more than about 33% of the time to break even. The ratio means nothing until you pair it with your win rate.
What the ratio is
Before a trade you know two distances: how far to your stop-loss (your risk) and how far to your target (your reward). The ratio is the second divided by the first. Risk 20 pips to make 40 and you have a 1:2 ratio.
Thinking in ratios makes you weigh every trade the same way, whatever its size or instrument. It turns "this looks good" into a measurable question: is the reward worth the risk?
R-multiples
The cleanest way to talk about outcomes is in R. Define 1R as the money you risked, say $50. A full win at a 1:2 target is +2R ($100). A loss is −1R (−$50). A trade you cut early might be −0.4R.
R-multiples let you compare trades across pairs and account sizes. A strategy that averages +0.3R per trade is described completely by that one number, whatever the dollar amounts behind it.
The win rate each ratio needs
To break even, the win rate you need is 1 ÷ (1 + reward-to-risk).
- 1:1. Break even above a 50% win rate.
- 1:2. Break even above about 33%.
- 1:3. Break even above 25%.
A trader who wins only 4 times in 10 can be solidly profitable at 1:2. A high win rate is not the goal. A positive combination of win rate and reward is.
Why a good ratio can still lose
The further away your target, the less often price reaches it. A 1:10 setup looks wonderful until you notice it wins 5% of the time. Ratio and win rate move against each other. Only their combination, your expectancy, shows whether you have an edge.
A 1:2 ratio is not automatically good, and 1:1 is not automatically bad. The right target is one your setup reaches often enough to be net positive. You learn that from data, not hope.
Setting realistic targets
Targets should come from the chart, not from a ratio you wish for. Place the stop where your idea is invalidated. Place the target at the next real level price must travel to. Then read off the ratio. If it is not worth taking, skip the trade.
Risk-reward is an output of a sensible stop and a realistic target, never an input. Forcing a target to hit a ratio gives you beautiful ratios you never reach.
Risk-reward and position size
Risk-reward decides the quality of a trade. Position sizing decides its size. Keep the money risked constant, say 1% per trade, so 1R stays roughly the same and your R-multiples remain comparable.
Questions
What is a good risk-reward ratio?
There is no universal answer. It depends on your win rate. A 1:2 ratio needs above about 33% to break even, while 1:1 needs above 50%.
Can a high risk-reward ratio still lose money?
Yes. The larger the target, the less often price reaches it, so a very high ratio usually comes with a low win rate. Only the combination tells you if there is an edge.
70–80% of retail investor accounts lose money trading CFDs. This page is education, not advice. All trade examples are constructed composites.
