What Is Risk-Reward Ratio in Trading?
The risk-reward ratio is one of the most important concepts in trading. Here's how to calculate it, why it matters for long-term profitability, and how to use it correctly.
Risk Management · June 24, 2026 · 4 min read
The risk-reward ratio (R:R) measures how much potential profit you stand to make relative to how much you risk losing on a trade. A 1:2 risk-reward ratio means you risk $1 to potentially make $2. A 1:3 ratio means you risk $1 to potentially make $3. The R:R is one of the simplest and most powerful tools in trading — because it determines what win rate you need to be profitable, independently of any specific strategy or market.
Why R:R Determines Minimum Win Rate
The math is straightforward: with a 1:1 R:R, you need to win more than 50% of trades to be profitable. With a 1:2 R:R, you only need to win more than 33% of trades to be profitable. With a 1:3 R:R, you only need to win more than 25% of trades. This insight is liberating: a trader who loses 70% of their trades can still be profitable if their average winner is 3× their average loser. Conversely, a trader who wins 70% of trades can still lose money if their average loser is 3× their average winner (a tragically common situation for traders who cut winners early and hold losers).
How to Set Your R:R Before Every Trade
Before entering any trade, calculate: (1) Entry price. (2) Stop loss price — where you exit if wrong. (3) Target price — where you exit if right. (4) Risk = distance from entry to stop. (5) Reward = distance from entry to target. (6) R:R = Reward ÷ Risk. If the R:R is below 1.5:1 (meaning you risk more than 67% of the potential gain), the trade is generally not worth taking. This simple check eliminates the majority of poor-quality trade entries before they are placed — which is exactly what it is designed to do.
R:R and Win Rate Together: Expectancy
True trading edge comes from the combination of R:R and win rate — called expectancy. Expectancy = (Win Rate × Average Win) − (Loss Rate × Average Loss). A system with 40% win rate and 1:2 R:R has expectancy of (0.40 × 2) − (0.60 × 1) = 0.80 − 0.60 = +0.20R per trade. That positive expectancy means the system makes 0.20× the risk on every trade, on average. Over 100 trades risking $100 each, that's +$2,000. Understanding expectancy transforms how you evaluate trading systems — you stop asking 'did I win?' and start asking 'is my system producing positive expectancy?'
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