Risk-Reward Ratio Explained (With Examples)
A risk-reward ratio compares how much you risk on a trade to how much you aim to gain. A 1:2 ratio means you risk one unit to make two — for example, risking $100 to target $200. It is one of the two numbers (alongside win rate) that decide whether a strategy makes money over time. This guide explains how to read it, how it trades off against win rate, and the mistakes that quietly ruin otherwise-good systems. No signals, just the math.
How to read a risk-reward ratio
The ratio is written risk : reward. The first number is what you lose if the trade hits your stop; the second is what you make if it hits your target.
- 1:1 — you risk $100 to make $100.
- 1:2 — you risk $100 to make $200.
- 1:3 — you risk $100 to make $300.
Mechanically, it comes straight from your levels: the distance from entry to stop is the risk; the distance from entry to target is the reward. Divide the second by the first and you have the ratio. The risk-reward calculator does this instantly from your entry, stop, and target — useful before you enter, when the numbers should decide whether the trade is even worth taking.
Worked examples
Example 1 — a 1:2 trade. You buy at 1.1000, stop at 1.0950 (50 pips risk), target at 1.1100 (100 pips reward). Ratio = 1:2. If you risk 1% of a $10,000 account ($100), a win returns roughly $200 and a loss costs $100.
Example 2 — a 1:3 trade. Same entry and stop, but the target sits at 1.1150 (150 pips). Ratio = 1:3. The same $100 risk now targets $300. Higher reward per unit of risk — but, crucially, a more distant target is usually less likely to be reached. That trade-off is the whole point.
The trade-off nobody can escape: risk-reward vs win rate
Here is the insight that separates traders who understand the ratio from those who chase it: a higher risk-reward ratio almost always comes with a lower win rate. A more distant target is hit less often. A tighter stop (which raises the ratio) is triggered more often.
So chasing "only 1:3+ trades" is not free — you pay for it in a lower hit rate. The two numbers are linked, and what actually matters is their combination, captured by expectancy:
Expectancy = (win rate × average win) − (loss rate × average loss)
A strategy is profitable when expectancy is positive, and you can reach positive expectancy many ways: a high win rate with modest reward, or a low win rate with large reward. Neither number alone tells you anything. This is why the next question to ask is always: what win rate do you need to be profitable?
What counts as a "good" risk-reward ratio?
There is no universally good ratio — only a good pairing of ratio and win rate. That said, a useful floor: if your reward is smaller than your risk (below 1:1), you need a very high win rate just to break even, which is fragile. Most durable strategies aim for at least 1:1.5 to 1:2, because it gives breathing room to be wrong often and still profit. But a scalping strategy with a genuine 70%+ win rate can work below 1:1, and a trend system might thrive at 1:4 with a 35% win rate. The data decides, not a rule of thumb.
Common risk-reward mistakes
- Moving the target to fake a better ratio. Setting an unrealistic target just to show 1:3 on paper does not make the trade better — it makes the target less likely and the ratio meaningless.
- Moving the stop to "avoid" a loss. Widening a stop after entry worsens your real ratio and turns a planned 1:2 into an unplanned 1:1 or worse. The levels are set before entry for a reason.
- Ignoring win rate entirely. A gorgeous 1:5 ratio with a 10% win rate loses money. The ratio is half the equation.
- Not tracking realized vs planned. Your planned ratio and your realized ratio often differ because of early exits and slippage. Only a journal shows the gap.
Ratios only matter if you record them
Planned risk-reward is a hypothesis; your journal is where it meets reality. Liquiditrax auto-journals every MT4/MT5 trade — planned vs realized ratio, win rate, and expectancy — so you learn which setups actually deliver. Join the journal waitlist →
FAQ
What is a good risk-reward ratio? There's no single good number — it depends on your win rate. A common durable range is 1:1.5 to 1:2, which lets you be wrong often and still profit. What matters is the combination of ratio and win rate (your expectancy), not the ratio alone.
How do you calculate risk-reward ratio? Divide your reward (distance from entry to target) by your risk (distance from entry to stop). Risking 50 pips to make 100 is a 1:2 ratio. A risk-reward calculator computes it instantly from your entry, stop, and target.
Does a higher risk-reward ratio mean a lower win rate? Usually, yes. A more distant target is reached less often, and a tighter stop is hit more often. The two numbers trade off, which is why you evaluate them together through expectancy rather than maximizing the ratio in isolation.
What is the minimum risk-reward ratio worth trading? Below 1:1 (reward smaller than risk) you need a very high win rate just to break even, which is fragile. Most durable strategies aim for at least 1:1 to 1:2 — but a proven high-win-rate system can justify less.
Is risk-reward ratio the same as expectancy? No. Risk-reward is one input; expectancy combines it with your win rate to give the average result per trade. Positive expectancy is what makes a strategy profitable, and you can reach it with different ratio/win-rate combinations.
Liquiditrax is an education platform and analytics software, not a financial service. Analytics and education only — not a solicitation, signal, or investment advice. Every decision and risk is your own. DYOR.