The short answer
The risk-reward ratio compares what you can make on a trade to what you risk. Risk one unit to make two and your ratio is 1:2. Measured in R-multiples — where 1R is the amount you risked — a 1:2 trade wins +2R or loses −1R. The key insight: 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. Risk-reward alone means nothing until you pair it with your win rate.
What is the risk-reward ratio?
Before you take a trade you know two distances: how far to your stop-loss (your risk) and how far to your target (your reward). The risk-reward ratio is simply the second divided by the first. Risk 20 pips to make 40 and you have a 1:2 ratio.
Thinking in ratios forces you to weigh every trade the same way regardless of 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 on a trade — say $50. Now every result is in the same unit: 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, and they make your whole track record legible. 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
Here is the arithmetic that reframes trading. 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 ~33%.
- 1:3 — break even above 25%.
So a trader who wins only 4 times in 10 can be solidly profitable at 1:2. High win rate is not the goal; a positive combination of win rate and reward is.
Why a “good” ratio can still lose
Chasing enormous ratios has a catch: 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, and only their combination — your expectancy — tells you if there is an edge.
A 1:2 ratio is not automatically good, and 1:1 is not automatically bad. The right target is the one your setup actually reaches often enough to be net positive, which you learn 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, and then read off the resulting ratio. If it is not worth taking, skip the trade.
This order matters: risk-reward is an output of a sensible stop and a realistic target, never an input you force the chart to fit. Forcing a target to hit a ratio is how traders end up with beautiful ratios they never actually reach.
Risk-reward and position size
Risk-reward decides the quality of a trade; position sizing decides its size. They are separate jobs. Keep the money risked constant (say 1% per trade) so that 1R is roughly the same each time, and your R-multiples become directly comparable.
With fixed risk per trade and honest R-multiples, your edge becomes measurable and your results stop depending on any single trade. That is the whole point of trading in R.
Frequently Asked Questions
What is a good risk-reward ratio?
There is no universally good ratio — it depends on your win rate. A 1:2 ratio needs to win above about 33% to break even, while 1:1 needs above 50%. The right target is one your setup reaches often enough to be net positive.
What is an R-multiple?
1R is the amount you risked on a trade. Results are then measured in R: a win at a 1:2 target is +2R, a full loss is −1R. R-multiples let you compare trades across different pairs and account sizes.
What win rate do I need for a 1:2 risk-reward?
About 33%. The break-even win rate is 1 divided by (1 plus the reward-to-risk), so a 1:2 ratio breaks even just above a one-third win rate and profits above that.
Can a high risk-reward ratio still lose money?
Yes. The larger the reward target, the less often price reaches it, so a very high ratio usually comes with a low win rate. Only the combination of ratio and win rate — your expectancy — tells you if there is an edge.
How do I set a risk-reward target?
Place your stop where the trade idea is invalidated and your target at the next real level price must reach, then read off the resulting ratio. Let risk-reward be an output of a sensible stop and realistic target, not a number you force.