What is a risk/reward ratio?
Beginners obsess over being right. Professionals obsess over what being wrong costs against what being right pays. That trade-off has a name, a formula and a break-even point you can calculate before you click — and it is the reason a trader who loses 60% of the time can be profitable while one who wins 80% of the time goes broke.
What does "1:3" actually mean?
The first number is your risk, the second your reward, both measured from the entry. Enter at $100 with a stop at $95 and a target at $115: you risk $5 to make $15, so the ratio is 1:3. Traders often call the risk unit "1R", which makes the target "3R". The ratio says nothing about how likely the target is — that is the job of your analysis. It only says what the outcome is worth if it happens.
The mistake that empties accounts is writing the ratio the other way round without noticing. Risking $300 to make $100 is 3:1 in favour of the market, not you. It feels safe because it wins often; it is the classic profile of a strategy that grinds up for months and gives everything back in a week.
What win rate do I need for each ratio?
Break-even win rate = 1 ÷ (1 + R), where R is the reward per unit of risk. Below that rate you lose money over time no matter how good the entries feel.
| Risk : reward | Break-even win rate | At a 40% win rate, per 100 trades ($100 risk) |
|---|---|---|
| 1 : 1 | 50.0% | 40 × $100 − 60 × $100 = −$2,000 |
| 1 : 2 | 33.3% | 40 × $200 − 60 × $100 = +$2,000 |
| 1 : 3 | 25.0% | 40 × $300 − 60 × $100 = +$6,000 |
| 1 : 5 | 16.7% | 40 × $500 − 60 × $100 = +$14,000 |
| 3 : 1 (backwards) | 75.0% | 40 × $100 − 60 × $300 = −$14,000 |
Fees and slippage are left out so the shape is clear; both push every break-even rate higher.
Read the last row twice. A 40% win rate is perfectly normal for a trend-following method — and with the ratio backwards it is a disaster.
Why do beginners get the ratio backwards?
Because a tight target and a wide stop produce a high win rate, and a high win rate feels like skill. The wide stop rarely triggers, the small target is hit constantly, and for weeks the journal looks brilliant. Then one loss costs the size of ten wins. The trader concludes they were unlucky; the arithmetic says they were paying for the feeling of winning.
The honest test is to measure both distances before entering — stop where the idea is proven wrong, target at a real level (prior support or resistance, not a round number) — and refuse the trade if the ratio comes out below your minimum. Most traders who survive set that minimum around 1:2.
When is a high risk/reward ratio the wrong goal?
When the target is a wish. Stretching the target from 2R to 6R makes the ratio look wonderful and the win rate collapse, because price rarely travels that far without a pullback that stops you out first. The ratio only means something when the target is a place price has a structural reason to reach. A realistic 1:2.5 with a 45% win rate beats an imaginary 1:6 with a 12% win rate: +0.575R per trade against −0.16R.
It is also the wrong goal when your stop is set by your wallet rather than the chart. Tightening a stop to improve the ratio does not improve the trade; it moves the stop inside normal noise, where it gets hit by nothing in particular.
FAQ
Is 1:2 or 1:3 a good risk/reward ratio? Either is workable if the target is a real level. 1:2 needs a win rate above 33%; 1:3 above 25%. What matters is that the ratio is measured to a structural target, not stretched to look good.
Does a higher ratio always mean more profit? No. Stretching targets lowers the win rate. Profit per trade is (win rate × reward) − (loss rate × risk); a realistic 1:2.5 with a 45% win rate earns more than a fantasy 1:6 with a 12% win rate.
How do I calculate my ratio before a trade? Measure entry to stop (risk) and entry to target (reward), then divide reward by risk. The risk/reward planner does the arithmetic and shows the break-even win rate.
Run your next setup through the numbers first
Entry, stop and target in; ratio, break-even win rate and expectancy out — before any money is at risk.
Every key term, one roadmap
The whole slide course — ten free PDF parts, 328 pages.
The ratio is the second of the three numbers you fix before every trade — the first is the stop, the third is the size. Position size calculator turns the stop distance into a size; expectancy combines ratio and win rate into one number; and Lesson 1 explains why judging decisions by that number, not by outcomes, is the whole job.