Risk-reward ratio
Also called: R:R · risk/reward · reward-to-risk ratio
Definition
The risk-reward ratio compares how much you could lose on a trade, up to your stop-loss, with how much you could gain, up to your take-profit target.
This entry is shown in English.
How Risk-reward ratio works
You measure risk as the distance from entry to stop-loss and reward as the distance from entry to take-profit. A trade risking 100 to make 300 has a risk-reward ratio of 1:3. Some platforms and traders write it the other way round as reward-to-risk, so check which convention is being used.
The ratio matters because it works together with your win rate. With a 1:3 ratio, you can be wrong on most trades and still come out ahead. With a 1:0.5 ratio, you need to win far more often than you lose just to break even, before fees.
A good ratio on paper is only useful if the target is realistic. Setting a take-profit far beyond a strong resistance zone makes the ratio look attractive but lowers the chance of reaching it. Fees and slippage also reduce the real reward, especially on short-term trades with small targets.
Example
Suppose you buy at 1.00 USDT with a stop-loss at 0.95 and a target at 1.15. Risk is 0.05 and reward is 0.15, so the ratio is 1:3. Over ten such trades with equal size, if you win 3 and lose 7, you gain 3 × 0.15 = 0.45 and lose 7 × 0.05 = 0.35 per coin, netting 0.10 per coin before fees. Break-even win rate for 1:3 is 1 ÷ (1 + 3) = 25%.
Common mistakes
- Moving the stop-loss further away during the trade, which quietly destroys the planned ratio.
- Picking unrealistic targets just to make the ratio look good.
- Ignoring win rate and assuming a high ratio alone makes a strategy profitable.
Learn and practise
FAQ
What is a good risk-reward ratio?
Many traders look for at least 1:2, but the right ratio depends on your win rate. A strategy that wins often can work with a lower ratio.
How do I calculate the break-even win rate?
Divide risk by the sum of risk and reward. For a 1:2 ratio that is 1 ÷ 3, about 33% before fees.