Glossary
Risk-Reward Ratio
How much you stand to make versus how much you risk on a trade — the core of long-term profitability.
Risk-Reward Ratio, explained
The risk-reward ratio (R:R) compares the distance to your stop loss against the distance to your take profit. Risking 20 pips to make 60 is a 1:3 ratio, often written as 3R. It tells you how much reward each unit of risk is buying.
Risk-reward and win rate work together. A high R:R means you can be wrong more often than you are right and still finish ahead — a trader winning just 40% of trades at 1:2 is profitable over time, while a 70% win rate at 1:0.5 can still lose money.
There is a break-even win rate for every ratio. At 1:1 you need to win more than half your trades; at 1:2 you only need about 34%; at 1:3 roughly 25%. Knowing this number for your average R turns 'am I good enough?' into a concrete, checkable target.
Crucially, risk-reward should be assessed before entry. Forcing a target to make the ratio look good, or moving the stop to chase a setup, is just rationalising a trade you should probably skip. The ratio is only meaningful if both the stop and target sit at honest, structural levels.
On the desk we filter setups by minimum R:R: if a clean structural stop and a realistic structural target do not produce at least roughly 1:2, the trade usually is not worth taking, however attractive the pattern looks.
Frequently asked questions
- What is a good risk-reward ratio?
- Many traders aim for at least 1:2, meaning the target is twice the stop distance. Higher ratios let you be wrong more often and still profit, but only if the targets are realistic enough to actually be hit.
- What win rate do I need at 1:2 risk-reward?
- Above roughly 34%. At 1:1 you need over 50%, at 1:2 about 34%, and at 1:3 around 25% — before costs. Knowing the break-even rate for your average R tells you whether your win rate is good enough.
Related terms
Stop Loss
A pre-set order that closes a losing trade at a defined price, capping the loss.
ReadTake Profit
A pre-set order that closes a winning trade at a target price, locking in the gain.
ReadExpectancy
The average amount you can expect to win or lose per trade over the long run.
ReadWin Rate
The percentage of trades that close in profit — meaningful only alongside risk-reward.
Read
Put it into practice
Education modules
More terms in the glossary.
Vocabulary is the easy part. See how the desk turns these concepts into structured trades with defined risk on every position.