Quick answer: The risk-reward ratio compares what a trade can lose against what it can gain, measured from entry to stop loss and from entry to take profit. A trade risking 30 pips to make 60 pips has a ratio of 1:2. The ratio only becomes useful together with win rate: at 1:2 you break even winning just 33.4% of trades, while at 1:0.5 you lose money even winning 59% of them.
Ask a losing trader for their setups and you will usually hear about entries. Ask a profitable one and the conversation turns to exits — where the stop sits, where the target sits, and what the distance between them implies about how often the strategy has to be right. That relationship is the risk-reward ratio, and it decides more about long-run results than any indicator on the chart.
This guide covers what the ratio measures, how to calculate it on a real EUR/USD trade, the breakeven win rate behind every ratio, the expectancy math that joins the two, and the situations where chasing a bigger number quietly makes a strategy worse.
What the Risk-Reward Ratio Measures
A risk-reward ratio expresses the money a trade puts at risk relative to the money it targets, both defined before entry. Risk is the distance from entry price to stop-loss price; reward is the distance from entry price to take-profit level. A ratio of 1:2 means the target is twice as far as the stop, so a winning trade pays for two losing ones.
Two conventions matter here, because sources mix them freely.
| Convention | Reads as | Example |
|---|---|---|
| Risk : reward | risk first, reward second | 1:2 — risk one unit to make two |
| Reward-to-risk (R multiple) | reward divided by risk | 2R — the same trade |
This guide uses risk first, so 1:2 and 1:3 describe targets larger than stops. The R-multiple notation says the same thing in one number and is the standard way to journal results: a full winner at 1:2 books +2R, a stopped trade books −1R, a trade closed halfway to target books +1R.
The ratio is a plan, not an outcome. It describes the trade you intend to take. Slippage, early exits and moved stops all change the realised figure, which is why journals track planned R against realised R separately.
How to Calculate Risk-Reward Ratio: A Worked EUR/USD Example
Divide the reward distance by the risk distance — or work in money, which forces the position size question into the open.
The setup. You buy EUR/USD at 1.0850, place the stop loss at 1.0820 and the take profit at 1.0910.
- Risk: 1.0850 − 1.0820 = 30 pips
- Reward: 1.0910 − 1.0850 = 60 pips
- Ratio: 30:60 = 1:2
In money. At 0.10 lot on EUR/USD, one pip is worth $1. The trade risks $30 to target $60. Same ratio, now in terms an account statement understands.
Sizing from the stop. Suppose the account holds $10,000 and the rule is 1% risk per trade — $100. With a 30-pip stop, the position size is $100 ÷ (30 pips × $10 per pip per standard lot) = 0.33 lots, which risks $99. The stop distance set the size; the size did not set the stop. Running that order backwards — picking a lot size first, then finding a stop that fits — is how a clean 1:2 plan becomes an oversized trade with a stop in the middle of the noise.
Spread belongs in the calculation too. A buy order fills at the ask and the stop triggers on the bid, so the effective risk is the stop distance plus the spread, and the effective reward is the target distance minus it. On a 30-pip stop with a 1-pip spread, the true ratio is closer to 31:59 than 30:60 — a small edit on majors, a material one on wider-spread instruments where published figures are indicative and vary by account type.
Breakeven Win Rate: What Each Ratio Demands
Every risk-reward ratio implies a minimum win rate, below which the strategy loses money no matter how good the entries feel. The formula is breakeven win rate = 1 ÷ (1 + R), where R is the reward divided by the risk.
| Ratio (risk:reward) | R multiple | Breakeven win rate |
|---|---|---|
| 1:0.5 | 0.5R | 66.67% |
| 1:1 | 1R | 50.00% |
| 1:1.5 | 1.5R | 40.00% |
| 1:2 | 2R | 33.33% |
| 1:3 | 3R | 25.00% |
| 1:4 | 4R | 20.00% |
| 1:5 | 5R | 16.67% |
Read the first row carefully, because it describes a common failure. A trader taking quick profits at half the stop distance needs to win two trades in three just to stand still — before spread and swap. Many scalping approaches live in exactly that zone without their owners ever running the arithmetic.
The table also explains why “always use at least 1:2” is repeated so often: at 1:2, a strategy survives being wrong two times out of three. That slack is what makes the ratio forgiving. What the table does not say is that win rate and ratio are linked — pushing the target further lowers the probability of reaching it. The two numbers cannot be optimised independently, which is where expectancy comes in.
Expectancy: Joining the Ratio to the Win Rate
Expectancy is the average result per trade once both numbers are known:
Expectancy = (win rate × R) − (loss rate × 1)
Four combinations, each computed rather than quoted:
| Win rate | Ratio | Expectancy per trade | On $100 risked |
|---|---|---|---|
| 40% | 1:2 | +0.20R | +$20 |
| 55% | 1:1 | +0.10R | +$10 |
| 30% | 1:3 | +0.20R | +$20 |
| 60% | 1:0.5 | −0.10R | −$10 |
The last row rewards a second look. A 60% win rate — a figure most traders would celebrate — loses money at a 1:0.5 ratio. Hit rate without a sound ratio is a slow leak dressed as success.
Averages hide variance, so we ran the numbers forward. In August 2026 we simulated 10,000 sequences of 100 trades for each combination above, at 1% risk per trade, compounded. At 40% win rate and 1:2, the median sequence returned +20.8% with a median maximum drawdown of 9.6% — yet 9.2% of sequences still ended at a loss after 100 trades. At 30% and 1:3, the same +0.20R expectancy produced a similar median return but deeper drawdowns (12.3%) and more losing sequences (16.1%), because low win rates bring longer losing streaks. And at 60% with 1:0.5, 91% of sequences lost money. A positive expectancy does not remove losing months; a negative one makes losing the expected outcome. For the streak-and-drawdown side of this math, see the drawdown guide.
Why a Bigger Ratio Is Not Automatically Better
The ratio is only as honest as the two prices behind it, and both can be gamed — usually by accident.
Targets drawn from wishes, not structure. Stretching a take profit from 60 pips to 120 pips doubles the paper ratio and may halve the probability of the price ever getting there. A 1:4 setup whose target sits beyond every relevant level is usually a 1:2 setup wearing makeup. Targets belong at locations the market has a reason to reach — prior highs and lows, measured moves, session extremes — not at whatever distance produces a satisfying number.
Stops tightened to inflate the ratio. Halving the stop also doubles the ratio on paper, and it doubles the frequency of being stopped by ordinary noise. A stop inside the market’s normal fluctuation converts a viable strategy into a donation schedule. Volatility measures such as ATR give a floor for how tight a stop can realistically sit on a given timeframe.
Ratios averaged across moved stops. A plan is only measurable if the stop stays where it was placed, or moves only in the trade’s favour. Widening a stop mid-trade turns a planned −1R into an unplanned −2R or worse, and one such trade erases the statistics of ten disciplined ones.
The working conclusion: choose the stop from structure and volatility, choose the target from structure, and accept whatever ratio results. If that ratio, combined with an honest win-rate estimate, produces negative expectancy — the trade is declined, not redesigned.
Setting the Ratio on MT4, MT5 or WebTrader
On MetaTrader, the ratio is fixed at order entry. Open a new order, and the ticket presents stop-loss and take-profit fields alongside the entry price; in MT5, reviewed on a live build in August 2026, the order window reports the stop and target distances as the levels are typed, so the ratio can be checked before the order is submitted rather than reconstructed afterwards. Dragging SL/TP lines on the chart after entry updates the same values.
Pending orders make the discipline easier: a buy limit or sell stop is placed with both exit levels attached, so the whole 1:2 or 1:3 structure exists before the market triggers anything and before the position tempts anyone to improvise. Trailing stops change the realised reward side dynamically — useful in trends, and a reason journals separate planned R from realised R.
FXPrimus provides MT4, MT5 and WebTrader with Negative Balance Protection on every live account. A free PrimusDEMO account will show how a fixed-ratio rule behaves across a few dozen trades, though demo fills exclude part of live execution friction, so treat demo statistics as a favourable case.
One caution on account settings: a high leverage ratio such as 1:1000 does not change any of the math above, but it removes the guardrail. It permits position sizes far beyond what a 1% risk rule would ever produce, so the sizing step — dollars risked divided by stop distance — has to come from the plan, because the margin requirement will not enforce it.
Common Risk-Reward Mistakes
- Quoting the ratio without the win rate. “I only take 1:3 trades” is half a sentence. The other half is how often those trades win.
- Ignoring spread and swap. Costs widen effective risk and shrink effective reward on every trade; on held positions, swap fees compound the effect.
- Taking profit early, letting losses run. The classic asymmetry converts planned 1:2 trades into realised 1:0.7 trades. The journal, not memory, reveals it.
- Copying a ratio across instruments. A stop that respects volatility on EUR/USD is noise-bait on gold or an index CFD. Ratios transfer; distances do not.
- Backtest ratios treated as promises. Published strategy statistics are frequently self-reported and rarely include execution costs. Past performance does not guarantee future results.
Risk-Reward Ratio — FAQ
What is a risk-reward ratio in trading?
It is the comparison between a trade’s potential loss and its potential gain, defined by the stop-loss and take-profit distances from entry. A trade risking 30 pips to target 60 pips has a 1:2 ratio. It is set before entry and describes the plan, not the result.
What is a good risk-reward ratio?
There is no universally good figure — only combinations of ratio and win rate that produce positive expectancy. Ratios of 1:2 and 1:3 are common working standards because they tolerate win rates of 33% and 25%. A 1:1 ratio can also be profitable if the strategy genuinely wins more than half its trades.
How do you calculate the risk-reward ratio?
Subtract the stop-loss price from the entry price to get risk, subtract the entry from the take-profit to get reward, then divide. Entry 1.0850, stop 1.0820, target 1.0910 gives 30 pips against 60 pips — a 1:2 ratio. Include the spread for the effective figure.
What win rate do I need for a 1:2 risk-reward ratio?
The breakeven win rate at 1:2 is 33.33%, from the formula 1 ÷ (1 + 2). Winning more than one trade in three produces a profit before costs. Spread, commission and swap raise the practical threshold slightly, so a working margin above 36–38% is a more realistic planning figure.
Is a 1:5 risk-reward ratio realistic?
It exists, mainly in trend-following and breakout approaches, but the win rate that accompanies it is typically low — breakeven sits at 16.67%. Long losing streaks are structurally certain at that hit rate, so the approach demands small position sizing and unusual psychological tolerance for being wrong most of the time.
What is an R multiple?
R is the amount risked on a trade — the distance to the stop, in money. Results are then expressed as multiples: a full winner at a 1:2 plan is +2R, a stopped loss is −1R. Journaling in R makes trades comparable across instruments and account sizes.
Does the risk-reward ratio include spread?
Not by default, and it should. A buy fills at the ask while the stop triggers on the bid, so the spread adds to risk and subtracts from reward. On tight stops or wide-spread instruments the published ratio overstates the effective one; spreads shown by brokers are indicative and vary by account type.
Can I be profitable with a 1:1 risk-reward ratio?
Yes, if the win rate genuinely exceeds 50% after costs. At 55%, expectancy is +0.10R per trade. The margin is thin, which makes execution quality, spread and swap decisive — a 1:1 approach on a wide-spread instrument gives back most of its edge in costs.
The Takeaway
The risk-reward ratio is the half of trading arithmetic that is fully under your control before entry: where the stop goes, where the target goes, and what the distance between them demands from your win rate. Set the stop from structure and volatility, size the position from the stop, place the target where the market has a reason to go, and let expectancy — not the appeal of a big multiple — decide whether the trade is worth taking. Strategies fail on this arithmetic far more often than they fail on entries.
FXPrimus offers MT4, MT5 and WebTrader with Negative Balance Protection on every live account, plus a free PrimusDEMO account for testing a fixed-ratio rule before committing capital.
Risk disclosure. This article is published for informational and educational purposes and is not financial advice, legal advice or tax advice, nor a recommendation to trade any instrument or apply any strategy. Trading forex and CFDs carries a high risk of loss and is not suitable for every investor; you may lose more than your initial deposit unless Negative Balance Protection applies. Leverage ratios up to 1:1000 magnify both gains and losses. Past performance does not guarantee future results, and simulated or backtested figures do not reflect live execution costs. Performance statistics published by signal providers and strategy sellers are often self-reported and should be verified against underlying statements. Spreads and trading conditions referenced are indicative, self-reported by FXPrimus, and vary by account type. Review the full terms and conditions and the relevant risk disclosure before opening an account or placing a trade. FXPrimus is a trading name of entities regulated in multiple jurisdictions; the entity you contract with, and the protections that apply, depend on your country of residence.