What Is the Risk/Reward Ratio? How to Use It in Trading

The definition

Before entering a trade you know three prices: where you get in, where you'll get out if you're wrong (the stop) and where you plan to take profit (the target). The distance from entry to stop is your risk; the distance from entry to target is your potential reward. The ratio between them is the risk/reward ratio, usually written as 1:x.

A 1:3 trade risks one unit to make three. If you risk $200, the target would pay $600. You can calculate any setup instantly with the risk/reward calculator.

Why the ratio is only half the story

The ratio describes the payoff if things go to plan. It doesn't describe how often they will. A trade with a magnificent 1:10 ratio and a 5% chance of reaching its target is a bad trade. A trade with a modest 1:0.7 ratio and a 70% hit rate is a good one.

The quantity that combines both is expectancy:

For a 1:2 setup that wins 40% of the time: 0.4 × 2 − 0.6 × 1 = +0.2R per trade. For a 1:3 setup that wins 20%: 0.2 × 3 − 0.8 = −0.2R. The second has the better ratio and the worse outcome.

The trade-off between ratio and win rate

Ratio and win rate pull against each other. Move the target further away and the ratio improves, but price reaches it less often. Move the stop closer and the ratio improves, but normal noise stops you out more often. There's no free lunch in either direction.

This is why “only take 1:3 trades” is incomplete advice. Fixed ratio rules can force targets beyond realistic levels — past resistance, beyond the typical range of the session — quietly lowering the win rate until the edge disappears. Better targets come from market structure; the ratio is then a filter, not a goal.

Typical ratios by trading style

• Trend following tends to run low win rates (30–40%) and needs large winners — ratios of 1:3 or more, often realised through trailing stops rather than fixed targets.
• Swing trading often lands around 1:1.5 to 1:3 with win rates of 40–55%.
• Mean reversion and scalping commonly accept ratios near or below 1:1 in exchange for win rates above 55–60%.

These ranges are descriptive, not prescriptive. Your own data — measured in R-multiples — is the only reliable guide.

Planned vs realised risk/reward

The ratio is a plan. What actually happens is measured as an R-multiple. Traders often plan 1:3 and realise 1:1.2 on winners because they exit early, while losers come in at a full −1R or worse. The gap between planned and realised ratio is one of the most valuable diagnostics a trading journal can give you — tools like Trading Metrics calculate it from the trades you log.

Key takeaways

• Risk/reward = potential reward ÷ potential risk, measured from your entry.
• A ratio is only meaningful alongside a win rate; together they define expectancy.
• Break-even win rate = 1 ÷ (1 + ratio). A 1:2 trade breaks even at 33.3%.
• Set targets from the market, then check the ratio — not the other way round.