What Is a Risk-Reward Ratio? The Win Rate You Need, Explained
Why winning 4 trades in 10 can make money, and why a bigger target alone can't.
By Pavel Penev, MScFounder, TradeWize · 10+ years trading the marketsThe short answer
A risk-reward ratio compares what you could lose on a trade with what you could make. Risk $5 to make $10 and it's 1:2. The ratio tells you the win rate you need to break even: 33.3% at 1:2 and 25% at 1:3. It doesn't tell you whether you'll get that win rate. On a price that moves at random, a bigger target is hit less often by exactly enough to cancel it out.
Most trading advice gets to the risk-reward ratio fast. Aim for 1:2 or better, people say, and you can be wrong most of the time and still make money.
That's true, as far as it goes. But it leaves out the part that decides whether you actually make money. So here's the whole thing: how to work it out, the win rate each ratio needs, what costs do to it, and what happened when we tested it on a coin flip.
How to work out a risk-reward ratio
Every trade plan has three prices: where you get in, where your stop-loss is, and where you plan to take profit.
Say you buy a stock at $100. Your stop is at $95 and your target is $110. The risk is the distance to your stop, $5. The reward is the distance to your target, $10.
So you're risking $5 to make $10. That's a risk-reward ratio of 1:2.
1:2 or 2:1?
People write it both ways. 1:2 puts the risk first and 2:1 puts the reward first, and both describe the same trade. In this article the risk always comes first, so a bigger second number means a bigger target.
The ratio doesn't depend on how many shares you buy. With 10 shares you risk $50 to make $100. With 100 shares it's $500 against $1,000. It's still 1:2.
That's why traders often measure results in R, where 1R is whatever you risked. A full stop-out is −1R. Hitting a 1:2 target is +2R.
The win rate you need to break even
Here's the useful part. The ratio tells you how often you need to be right.
At 1:2, one win pays for two losses. So you break even if you win 1 trade in 3, or 33.3% of the time. Anything above that is profit, before costs.
The rule is simple. Divide the risk by the risk plus the reward. At 1:2 that's 1 ÷ 3. At 1:3 it's 1 ÷ 4, or 25%. At 1:5 it's 1 ÷ 6, or 16.7%.
| Risk-reward ratio | You break even if you win | One win pays for |
|---|---|---|
| 1:0.5 | 66.7% | half a loss |
| 1:1 | 50.0% | 1 loss |
| 1:1.5 | 40.0% | 1.5 losses |
| 1:2 | 33.3% | 2 losses |
| 1:3 | 25.0% | 3 losses |
| 1:4 | 20.0% | 4 losses |
| 1:5 | 16.7% | 5 losses |
Before costs. Win more often than this and the ratio makes money. Win less often and it loses.
The break-even win rate falls fast at first, then flattens. The dashed line adds costs of 0.2R a trade, the cost of the 25-cent stop in the example further down.
Why winning 4 in 10 can beat winning 7 in 10
This is where the ratio surprises people. Take two traders, each risking $100 a trade.
The first wins 4 trades in 10, but each win is $200. Over 10 trades that's $800 won and $600 lost. They're up $200.
The second wins 7 trades in 10, but takes profit early, at $30. That's $210 won and $300 lost. They're down $90, even though they're right most of the time.
Wins 4 in 10
Up $200 every 10 trades.
- Risks $100 to make $200, a 1:2 ratio.
- Needs 33.3% to break even.
- Makes +0.2R a trade.
Wins 7 in 10
Down $90 every 10 trades.
- Risks $100 to make $30, a 1:0.3 ratio.
- Needs 76.9% to break even.
- Loses 0.09R a trade.
The number that combines the two is called expectancy. It's what you make per trade, on average. Multiply your win rate by your average win, then take away your loss rate times your average loss. For the first trader that's 0.4 × 2 − 0.6 × 1 = +0.2R a trade.
A high win rate feels good. Expectancy is what pays.
A bigger ratio isn't an edge on its own
So why not aim for 1:5 on every trade? You'd only need to win 1 in 6.
Because a target further away is harder to reach. The question is how much harder. So we tested it on a price with no edge in it at all: a coin flip.
We built a price that moves 10 cents at a time, up or down with equal odds. Every trade had a stop $1 below the entry. Then we ran 20,000 trades at each ratio, from 1:0.5 to 1:5, and counted how often the target came first.
How often the target was hit before the stop, out of 20,000 trades at each ratio. The white marks are each ratio's break-even win rate.
The win rate fell as the target moved away, and it landed almost exactly on the break-even line every time. At 1:2 the target came first in 33.9% of trades, against a break-even of 33.3%. At 1:5 it was 16.7%, the same as its break-even.
So every ratio made close to nothing. The average result ran from −0.027R to +0.018R a trade, which is just noise.
That isn't luck. On a price that moves at random, the chance of hitting a target before a stop is exactly the risk divided by the risk plus the reward. That's the same formula as the break-even win rate. So on a coin flip every ratio breaks even, and picking a bigger one can't fix a strategy.
The edge has to come from somewhere else: a reason to expect price to reach your target more often than chance. So the real question behind every ratio is whether the target is realistic. Is there resistance in the way? Has price reached that level before?
Learn it by doing
Reading about it is one thing — it clicks when you do it. Learn it hands-on with free, interactive lessons on TradeWize.
Try the free lesson →Costs raise the bar, most of all on tight stops
Every trade costs something: the spread, a commission, or both. You pay it on every trade, win or lose.
Those costs are charged per share, so a tight stop makes them bigger. To risk the same amount with a tighter stop, you buy more shares, and you pay the cost on every one.
Say costs come to 5 cents a share for the round trip. With a $1 stop that's 0.05R a trade. With a 25-cent stop it's 0.2R.
| Stop distance | Cost per trade | Break-even win rate | Edge if you win 40% |
|---|---|---|---|
| $2 | 0.025R | 34.2% | +0.175R |
| $1 | 0.05R | 35.0% | +0.150R |
| $0.50 | 0.1R | 36.7% | +0.100R |
| $0.25 | 0.2R | 40.0% | 0.000R |
Costs are the spread and commission together, for buying and selling. Before costs, 1:2 breaks even at 33.3% and a 40% win rate makes +0.2R a trade.
With a 25-cent stop, 1:2 needs a 40% win rate just to break even. The trader who wins 4 in 10 now makes nothing. Their whole edge goes on costs.
That's one reason a tight stop can look great on a chart and do badly in an account. It's also why the same strategy can work on a big, cheap stock and fail on a small one with a wide spread.
A low win rate means long losing streaks
Here's the part people find out the hard way. Two strategies can have the same edge and feel completely different to trade.
Take three of them. One wins 60% at 1:1. One wins 40% at 1:2. One wins 20% at 1:5. All three make +0.2R a trade on average.
The chance of a losing streak at least this long somewhere in 100 trades, for three strategies that each make +0.2R a trade. Worked out exactly, not simulated.
In 100 trades, the 60% strategy's longest losing run is typically 4 trades. For the 40% strategy it's 7. For the 20% strategy it's 15.
The 20% strategy loses 10 or more in a row in 93% of 100-trade stretches. The 40% one does in 20%, and the 60% one in 0.6%.
That's why the size of each trade matters so much at a low win rate. Lose 15 in a row while risking 2% of your account on each trade, and you're down 26%. At 1% a trade, you're down 14%.
If you can't sit through 15 losses without changing the plan, a 1:5 strategy isn't for you, however good it looks on paper.
Your real ratio can be worse than your plan
The ratio is a plan. What happens in the market can be different.
A stop-loss order turns into a market order once the stop price is reached. If the price gaps past your stop, say overnight or on news, you're filled at the next price available. A planned −1R can become −1.5R.
Winners can shrink too. Many traders close a trade early when it's going well and hold on when it isn't. That turns a planned 1:2 into something worse.
So keep a record of what you actually got, in R. Your real average win and loss decide your break-even win rate, not the ones you planned.
How to use it
- Work out the ratio before you enter. The risk is the distance to your stop and the reward is the distance to your target.
- Know your break-even win rate: the risk divided by the risk plus the reward. At 1:2 it's 33.3%.
- Check the target is realistic. A bigger ratio only helps if price can get there, so set targets at levels the chart gives you.
- Count your costs in R. The tighter your stop, the more they take.
- Expect losing streaks. The lower your win rate, the longer they get, so keep each trade small enough to sit through them.
- Record your results in R, not just in money. It's the only way to know your real win rate and your real ratio.
What is a good risk-reward ratio?
There isn't one number. Many traders look for at least 1:2, which breaks even at a 33.3% win rate. But a ratio is only good if you can win often enough at it. A 1:1 trade you win 60% of the time makes +0.2R a trade. A 1:3 trade you win 20% of the time loses 0.2R.
How do you calculate the risk-reward ratio?
Compare the distance to your stop with the distance to your target. Buy at $100 with a stop at $95 and a target at $110, and you risk $5 to make $10. That's 1:2.
What win rate do I need for a 1:2 risk-reward ratio?
33.3%, before costs, so 1 trade in 3. Costs push it higher, especially with a tight stop. At 5 cents a share and a 25-cent stop, it's 40%.
Is a 1:3 risk-reward ratio better than 1:2?
Not on its own. A 1:3 trade breaks even at 25%, but its target is further away, so it's hit less often. On a price that moves at random, both break even. What matters is whether your setups reach the target more often than chance.
Is 1:2 the same as 2:1?
Usually, yes. People write it both ways. 1:2 puts the risk first and 2:1 puts the reward first. Either way it means risking 1 to make 2.
Method, and what this cannot tell you
The break-even win rates, the costs and the losing streaks are worked out exactly, with no simulation. For the coin-flip test we built a price that moves 10 cents at a time, up or down with equal odds. We put a stop $1 below the entry and a target $0.50 to $5 above it, and ran 20,000 trades at each ratio from a fixed random seed, so anyone can run it again and get the same answer.
- Real prices aren't a fair coin. Trends, news and gaps all change the odds. The test shows what a ratio does on its own, with nothing else helping.
- The cost example uses 5 cents a share for the spread and commission together. Your costs depend on your broker and what you trade, and they can be much higher on small stocks, CFDs and crypto.
- The streak odds assume every trade is independent. Real losing runs tend to cluster, when a strategy stops suiting the market for a while.
- A stop isn't a guaranteed price. A gap can fill it below your stop, so a real loss can be bigger than 1R.
Practise setting stops and targets before you trade
Our technical analysis track teaches you to place stops and targets at levels the chart gives you, then check the ratio, with drills on charts you practise on.