Trading term
What is Risk-reward ratio?
The risk-reward ratio compares how much you stand to lose on a trade against how much you stand to gain — the distance from entry to your stop-loss versus the distance to your target. A 1:3 ratio risks $1 to make $3. It's the core math of whether a trade is worth taking.
Every planned trade has two distances: from your entry down to your stop-loss (the risk) and from your entry up to your target (the reward). The risk-reward ratio expresses their relationship — risk $1 to make $2 is 1:2, risk $1 to make $3 is 1:3. A favourable ratio means the potential reward is several times the risk, so you don't need to be right very often to come out ahead.
That's the key insight: risk-reward and win rate work together. With a 1:3 ratio, you can lose twice as often as you win and still make money, because each win is three times the size of each loss. This is why professional traders obsess over the ratio and happily take trades they'll lose more than half the time — as long as the winners are big enough relative to the losers. A common rule is to skip any trade offering less than about 1:2.
From a $50 entry, the risk down to the $47 stop is $3; the reward up to the $59 target is $9. The reward zone is three times the risk zone — a 1:3 ratio.
For example
You buy at $50 with a stop at $47 (risking $3) and a target at $59 (a $9 reward). That's a 1:3 risk-reward ratio — risking $3 to potentially make $9, so even winning just 40% of such trades is profitable over time.
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Explore Premium →Why it matters to you
The risk-reward ratio is what makes trading a numbers game you can win rather than a series of coin flips. By insisting each trade offers far more upside than downside, you build an edge that survives being wrong often — the single most important habit separating consistent traders from the rest.
⚠ A great ratio needs a realistic target
It's easy to manufacture a beautiful 1:5 ratio by setting a fantasy target price will never reach. A ratio only means something if the target is realistic — anchored to actual resistance or a measured move. Judge the ratio and the probability together, not the ratio alone.