The ratio
Risk/reward compares how far the stop is from the entry with how far the target is. A buy at 1.1000 with a stop at 1.0950 (50 pips) and a target at 1.1100 (100 pips) has a risk/reward of 1:2: you risk one unit to make two.
Traders often express results in R, where 1R is the amount risked on the trade. A full stop-out is −1R, the target above is +2R. Thinking in R separates the quality of a strategy from the size of the account.
The win rate you need to break even
break-even win rate = 1 ÷ (1 + reward/risk)
| Risk : reward | Break-even win rate |
|---|---|
| 1 : 0.5 | 66.7% |
| 1 : 1 | 50% |
| 1 : 1.5 | 40% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25% |
| 1 : 4 | 20% |
Neither a high win rate nor a high ratio is good on its own. A 1:3 strategy that wins 20% of the time loses money; a 1:0.5 strategy that wins 75% makes money. What matters is the combination.
Expectancy
expectancy (R) = win rate × average win (R) − loss rate × average loss (R)
Example
- Win rate 40%, average win 2R, average loss 1R.
- 0.40 × 2 − 0.60 × 1 = +0.2R per trade.
- Risking $100 per trade, 100 trades → about +$2,000 before costs.
Expectancy is an average over many trades; any ten trades can look very different. That's why sizing has to survive losing streaks: at a 40% win rate, a run of eight losses in a row is not unusual over a year of frequent trading.
The ratio on paper vs the ratio you trade
- Spread and commission add to the loss and subtract from the win. On a 10-pip stop and 10-pip target, a 1-pip spread turns 1:1 into roughly 11 risk : 9 reward.
- Slippage on entry and stops shifts both sides, usually against you.
- Multiple take-profits blend ratios: half at 1:1 and half at 1:3 is 1:2 overall, but only if both halves have the same stop.
- Breakeven moves convert some −1R outcomes into 0R and some +2R outcomes into 0R as well. See breakeven and trailing stops.
Check any setup in the risk/reward calculator, then size it with the lot size calculator so 1R is the amount you chose.