Trading basicsUpdated 3 min readBy the FXNOD team
What is risk-to-reward ratio in trading?
The risk-to-reward ratio compares what a trade can lose with what it can gain. Risking 10 to make 20 is a ratio of 1:2. It tells you the win rate you need to break even: risk divided by risk plus reward. At 1:2 that is 33.3%. A ratio means nothing without the win rate beside it.
The formula
Risk is the amount you lose if the trade fails. Reward is the amount you gain if it works. The ratio is risk to reward, written 1:2 when the reward is twice the risk. To compare trades, divide the reward by the risk: a result of 2 means you gain two for every one you risk.
The break-even win rate
Break-even win rate equals risk divided by the sum of risk and reward. It is the share of trades you must win simply to finish at zero.
| Risk : reward | Reward per 1 risked | Win rate needed to break even |
|---|---|---|
| 1:3 | 3.00 | 25.0% |
| 1:2 | 2.00 | 33.3% |
| 1:1 | 1.00 | 50.0% |
| 1:0.95 | 0.95 | 51.3% |
| 1:0.5 | 0.50 | 66.7% |
| 1:0.1 | 0.10 | 90.9% |
Why a high win rate can still lose
The last row is where many digit strategies live. A contract that wins nine times in ten by chance and pays about a tenth of the stake needs to win more than 90.9% of the time to make anything. Winning 90% feels excellent and loses money. Always ask what the wins pay before being impressed by how often they come.
Expected value: the number that settles it
Expected value per trade equals the win rate multiplied by the reward, minus the loss rate multiplied by the risk. With a 40% win rate at 1:2, risking 10: 0.40 x 20 minus 0.60 x 10 equals 8 minus 6, a gain of 2 per trade on average. With a 60% win rate at 1:0.5, risking 10: 0.60 x 5 minus 0.40 x 10 equals 3 minus 4, a loss of 1 per trade. The second trader wins more often and loses money.
On fixed-payout contracts
With options that pay a fixed amount, the ratio is set by the quote rather than by where you put a stop. If a stake of 10 returns 19.50 on a win, the risk is 10 and the reward is 9.50: a ratio of 1:0.95 and a break-even win rate of 51.3%. Read the payout on the order form before every trade and you know the win rate that contract demands.
Using it without fooling yourself
- A wide reward target improves the ratio and lowers the chance of reaching it. The two move together.
- Measure the ratio you actually achieved, from your trade history, not the one you planned.
- Costs count. Spreads and commissions reduce the reward and add to the risk.
- Judge a strategy on expected value over many trades, never on the ratio alone.
Questions people ask
- What is a good risk-to-reward ratio?
- One your win rate can support. A 1:2 ratio is profitable above a 33.3% win rate. A 1:0.5 ratio needs more than 66.7%. Neither is good or bad without the win rate.
- How do I calculate risk-to-reward?
- Divide the possible gain by the possible loss. Risking 10 to gain 25 gives 2.5, written 1:2.5.
- Is a high win rate enough to be profitable?
- No. A 90% win rate loses money if each win pays a tenth of what a loss costs. Win rate and payout must be judged together.
- What is expected value in trading?
- The average result per trade over many trades: win rate times average win, minus loss rate times average loss. A strategy needs it to be positive after costs.
Practise it with virtual funds
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