Risk Reward Ratio Guide

What is Risk Reward Ratio?

The risk reward ratio is one of the most important concepts in trading risk management. It measures the potential profit of a trade compared to the amount of money a trader is willing to lose.

For example, if a trader risks $100 to potentially gain $300, the risk reward ratio is 1:3. This means the potential reward is three times greater than the possible loss.

Why Risk Reward is Important

Successful traders do not rely on winning every trade. Instead, they focus on maintaining a favorable risk reward ratio. Even with a win rate of only 40–50%, traders can remain profitable if their winning trades are significantly larger than their losses.

By consistently applying a strong risk reward ratio, traders ensure that profits outweigh losses over time.

Risk Reward Formula

If a trade risks $50 and has a potential profit of $150, the risk reward ratio is 3:1.

Example of Risk Reward

Imagine a trader opening a position in the market with the following setup:

• Entry price: $100
• Stop loss: $95
• Take profit: $115

In this scenario:

• Risk = $5
• Reward = $15

This results in a risk reward ratio of 1:3.

How Traders Use Risk Reward

Many professional traders only take trades that offer a minimum risk reward ratio of 1:2 or higher. This means the potential profit must be at least twice the possible loss.

This approach ensures that even if some trades lose, the winning trades can still generate overall profits.

Common Risk Reward Strategies

• Scalping traders often use 1:1 or 1:1.5 ratios
• Day traders usually target 1:2 ratios
• Swing traders often aim for 1:3 or higher

Use Our Risk Reward Calculator

You can quickly evaluate your trade setups using our risk reward calculator. Simply enter your entry price, stop loss, and take profit to calculate the risk reward ratio instantly.