⚖️ Risk-Reward Ratio Explained: How to Set Profitable Trades
Imagine two traders. Trader A wins 70% of trades, makes $100 per win, loses $300 per loss. Trader B wins 30%, makes $300 per win, loses $100 per loss. Who's more profitable? Most beginners pick A. The right answer is B.
The Math
Trader A: (0.7 × $100) − (0.3 × $300) = $70 − $90 = −$20 per trade (losing!)
Trader B: (0.3 × $300) − (0.7 × $100) = $90 − $70 = +$20 per trade (winning!)
Win rate without R:R is meaningless. R:R without win rate is meaningless. Together, they tell you whether your strategy actually has an edge.
What Is Risk-Reward?
R:R is the ratio between what you're risking and what you're trying to make on a single trade. If you risk $100 to make $200, that's a 1:2 R:R.
Formula: R:R = (Target − Entry) ÷ (Entry − Stop)
Try our Risk-Reward Calculator.
Why 1:2 Is the Floor
Each R:R has a corresponding break-even win rate:
- 1:1 R:R → need 50%+ win rate
- 1:2 R:R → need 33%+ win rate (sweet spot)
- 1:3 R:R → need 25%+ win rate
- 1:5 R:R → need 17%+ win rate
1:2 means even if you lose 2 out of 3 trades, you break even. Add fees, slippage, and emotional management — 1:2 is the floor for sustainable trading.
Why Most Traders Hate Good R:R
Trades with 1:3 or 1:5 R:R feel uncomfortable because they have a lower win rate. You'll lose more often. Most traders can't psychologically handle a 35% win rate even when it's mathematically profitable.
This is why most retail traders gravitate to scalping (high win rate, terrible R:R) and lose. Their hit rate feels good, but each loser eats 2-3 winners.
How to Use R:R Properly
- Set your stop first — based on technical invalidation, not "how much am I willing to lose"
- Calculate the target — must be at least 2x stop distance
- Skip the trade if R:R doesn't qualify — most setups fail this test, and that's fine
Common Mistakes
"My target is too far, let me move it closer." — Now you're worsening R:R to feel comfortable. The market doesn't care about your comfort.
"My stop got hit, let me move it wider." — Moving stops mid-trade destroys your R:R. The discipline is in not doing this.
Bottom Line
Stop optimizing for win rate. Start optimizing for R:R. A 30% hit rate with 1:3 R:R will outperform a 60% hit rate with 1:1 R:R every single time — over enough trades.