Risk to Reward Ratios — Risk and Trade Management

Defining Risk-to-Reward

The risk-to-reward ratio compares how much you stand to lose if your stop-loss is hit against how much you stand to gain if your take-profit is hit. It's calculated as potential reward divided by potential risk.

[Read the lesson: Risk-to-Reward Ratios](/learn-to-trade/risk-and-trade-management/risk-to-reward-ratios)

Worked Example

Suppose your stop-loss is 30 pips away from entry and your take-profit is 90 pips away. The risk-to-reward ratio is 90 / 30 = 3, often written as 1:3, meaning you stand to gain three times what you risk.

**Calculating the Ratio:** Risk = 30 pips. Reward = 90 pips. Ratio = Reward / Risk = 90 / 30 = 3. This is written as a 1:3 risk-to-reward ratio: for every $1 risked, $3 is targeted in profit.

[Read the lesson: Risk-to-Reward Ratios](/learn-to-trade/risk-and-trade-management/risk-to-reward-ratios)

Why Win Rate Alone Isn't Enough

A high win rate sounds appealing, but it means little without knowing the risk-to-reward ratio. A strategy that wins 70% of the time but risks $300 to make $100 per trade can still lose money overall.

The breakeven win rate for a given ratio is Risk / (Risk + Reward). For a 1:3 ratio, that's 1 / (1 + 3) = 25%, meaning a trader only needs to win 25% of trades to break even, leaving plenty of room for profit above that.

**Breakeven Win Rate for 1:3:** Breakeven win rate = Risk / (Risk + Reward) = 1 / (1 + 3) = 25%. Winning more than 25% of trades with a consistent 1:3 ratio produces a net profit over time.

[Read the lesson: Risk-to-Reward Ratios](/learn-to-trade/risk-and-trade-management/risk-to-reward-ratios)