Risk-Reward Ratio: The Math That Matters
Why risking $100 to make $200 is fundamentally different from risking $100 to make $100.
Researched and written by Laurent Why Risk-Reward Is Non-Negotiable
The risk-reward ratio is the relationship between what you stand to lose (your stop-loss distance) and what you stand to gain (your take-profit distance). It directly determines the minimum win rate needed to be profitable.
| Risk:Reward | Minimum Win Rate to Break Even | Realistic? |
|---|---|---|
| 1:1 | 50%+ | Tight margin. Spread/commission erodes quickly. |
| 1:1.5 | 40% | Feasible for most strategies. |
| 1:2 | 34% | Comfortable. The standard for most swing traders. |
| 1:3 | 25% | Only 1 in 4 trades needs to win. But requires patience. |
| 1:4 | 20% | Very forgiving on win rate, but most trades will be losers. |
How to Calculate RR for a Trade
Entry: 1.0850
Stop-loss: 1.0810 (40 pips risk)
Take-profit: 1.0950 (100 pips reward)
Risk:Reward = 40:100 = 1:2.5
Minimum win rate needed: 1 / (1 + 2.5) = 28.6%
The Trap of Unrealistic Targets
Some traders set targets far away just to get a "good" RR on paper. A 20-pip stop with a 200-pip target is 1:10 RR, but if there's a major resistance level 60 pips away, your target will rarely be hit. A realistic 1:2 target that actually gets hit is infinitely better than a theoretical 1:10 that never does.
Set your take-profit at a level where price is likely to react: the next S/R level, a Fibonacci extension, a previous swing high. Then calculate the RR. If it's below your minimum (typically 1:1.5 or 1:2), skip the trade. Not every setup deserves your capital.
Partial Profits and RR
Many traders use a split approach:
- TP1: Close 50% of the position at 1:1 (break even on risk). Move stop to entry.
- TP2: Let the remaining 50% run to 1:2 or 1:3 with a trailing stop.
This reduces the overall RR slightly (because half the position takes profit early) but dramatically improves the psychological experience: you've locked in profit, the remaining position is "free," and you can let it run without anxiety.
Key Takeaways
- • Risk-reward ratio (RR) = potential loss : potential gain. 1:2 means risking $1 to make $2.
- • At 1:2 RR, you only need to be right 34% of the time to break even (after costs).
- • At 1:1 RR, you need >50% win rate just to break even.
- • Set your MINIMUM acceptable RR before entering any trade. Most professionals use 1:2 or better.