The risk/reward ratio is one of the most quoted numbers in trading, and one of the most misunderstood. In this guide you'll learn what the risk/reward ratio really measures, how it connects to your win rate, how to calculate the expectancy of a trading method and how to put all of it to work inside a realistic trading plan.
In short: a risk/reward ratio on its own doesn't tell you whether a method works; you have to read it alongside your win rate. Together they give you expectancy, the average amount you make or lose per trade measured in units of risk (R).
What the risk/reward ratio means
The risk/reward ratio compares what you put at risk on a trade with what you're aiming to make. If your stop loss is 20 pips away and your target is 40 pips away, the ratio is 1:2: you risk one unit to try to make two.
To keep things clear, many traders use R, the amount risked on a trade. If you risk $100, then 1R = $100. A trade that makes $200 is +2R; a trade that hits the stop is −1R.
Thinking in R has a big advantage. It lets you compare trades of different sizes and judge your method without account size skewing the picture.
The mistake of looking at the ratio alone
You'll often hear that you should "always aim for 1:3." The catch is that a more distant target is also harder to reach. Push the target further and your win rate usually drops.
Picture two approaches:
- Approach A: 1:3 ratio, but it only wins 20% of the time.
- Approach B: 1:1 ratio, and it wins 55% of the time.
Which one is better? You can't tell from the ratio. You need the win rate too, and there's a simple tool that combines both: expectancy.
Expectancy: the number that ties it together
Expectancy tells you how much you make or lose, on average, per trade. Expressed in R, the formula is:
Expectancy = (Win rate × Average win in R) − (Loss rate × Average loss in R)
If your losses are always 1R, it simplifies to:
Expectancy = (Win rate × Reward-to-risk) − (1 − Win rate)
Apply it to the two approaches above (illustrative math):
- Approach A: (0.20 × 3) − 0.80 = 0.60 − 0.80 = −0.20R per trade.
- Approach B: (0.55 × 1) − 0.45 = 0.55 − 0.45 = +0.10R per trade.
The approach with the "better" ratio has negative expectancy, while the modest one is positive. Positive expectancy guarantees nothing over a handful of trades, but over a large, well-logged sample it tells you the method rests on sound math.
Break-even win rate table
The break-even win rate is the minimum win rate you need to neither make nor lose money at a given ratio, before costs. The formula:
Break-even win rate = 1 ÷ (1 + Reward-to-risk)
| Risk/reward ratio | Break-even win rate |
|---|---|
| 1:0.5 | 66.7% |
| 1:1 | 50.0% |
| 1:1.5 | 40.0% |
| 1:2 | 33.3% |
| 1:2.5 | 28.6% |
| 1:3 | 25.0% |
| 1:4 | 20.0% |
Read it like this: at 1:2, you need to win more than 33.3% of the time just to cover your losses. If your records show a 30% win rate at that ratio, the method doesn't hold up, however good the ratio sounds.
Costs change your real ratio
Spread, commissions and slippage shrink your effective ratio, especially with tight stops.
Illustrative example: you plan a 10-pip stop and a 20-pip target (1:2). If total trading costs equal about 1 pip, you're really risking around 11 pips to make around 19. Your actual ratio is closer to 1:1.7, and the break-even win rate climbs from 33.3% to roughly 37%.
With a 50-pip stop, that same pip of cost barely registers. The tighter your stop, the more important it is to bake costs into your numbers.
How to find your own ratio and win rate
The only reliable way to know your numbers is to measure them. Generic figures from the internet don't describe your method or your execution.
- Set fixed rules for entry, stop and target. Without stable rules, the numbers mean nothing.
- Log every trade in R: outcome, planned ratio and actual ratio. A trading journal is the right tool for this.
- Build a meaningful sample. With 20 trades, luck dominates; with 100 or more, patterns start to show.
- Test on historical data before risking anything live. Solid backtesting helps you estimate the win rate of each setup.
- Calculate expectancy per setup, not just overall. Sometimes one setup is carrying the rest.
Using the ratio inside your trading plan
Once you know your numbers, the ratio stops being a slogan and becomes a working rule. A few ideas for your plan:
- Set a minimum ratio per trade. For example: "I don't enter unless the logical target offers at least 1:1.5." The target should come from market structure, not from a number you made up.
- Don't stretch the target to "improve" the ratio. If the next meaningful level is at 1:1, forcing a 1:3 tends to turn winners into losers.
- Review your actual ratio every month. If you often close early, your real ratio will be lower than planned, and so will your expectancy.
- Pair the ratio with position sizing. The ratio sets how many R you can make; position size sets how much each R is worth in money.
All of this belongs inside a structured trading plan, where every rule can be measured and reviewed.
Losing streaks: what expectancy won't tell you
Even a method with positive expectancy has losing streaks. At a 40% win rate, any single trade has a 60% chance of losing, and strings of 6, 8 or more losses in a row show up naturally over a long sample.
That has two practical consequences:
- Your risk per trade has to survive the streaks. Risk too much and a perfectly normal streak can breach your account's daily or maximum loss before the expectancy has time to play out.
- Low win rate methods demand more emotional tolerance. A high ratio with a low win rate can be mathematically sound and still hard to follow if every streak makes you second-guess it.
Reading a full example
Say your journal shows the following over 120 trades (illustrative figures):
- Win rate: 45%.
- Average win: 1.6R.
- Average loss: 1R.
Expectancy: (0.45 × 1.6) − (0.55 × 1) = 0.72 − 0.55 = +0.17R per trade.
At 0.5% risk per trade, each R equals 0.5% of the account. That figure promises nothing, but it does tell you the method has a statistical edge on paper, and that your focus should be on executing it with discipline, keeping costs in check and holding a risk level that can ride out the streaks.
Trading involves risk, and past results don't guarantee future ones. Expectancy is an evaluation tool, not a forecast.
FAQ
What is a good risk/reward ratio?
There's no universally good ratio. A 1:1 can work with a high win rate and a 1:3 can fail with a low one. What matters is that the combination produces positive expectancy after costs.
How do you calculate the break-even win rate?
Divide 1 by (1 + reward-to-risk). At 1:2, the break-even win rate is 1 ÷ 3 = 33.3%. Below that, the method loses over time even before costs.
What is expectancy in trading?
It's the average result per trade expressed in R. You calculate it as (win rate × average win) − (loss rate × average loss), and it lets you compare methods with different ratios.
Should I move my take profit to improve the ratio?
Not if the new target isn't backed by market structure. Pushing the target out for no reason usually lowers your win rate and cancels out the better ratio.