Risk/Reward Ratio Explained (With Examples)
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What the risk/reward ratio measures
The risk/reward ratio (often abbreviated as R:R) compares how much you stand to lose on a trade against how much you stand to gain, based on your entry, stop-loss and take-profit levels. It is expressed as a ratio such as 1:2, meaning you are risking one unit of price movement to potentially gain two.
On its own, the ratio says nothing about whether a strategy is profitable. It only describes the shape of a single trade's potential outcome — a large ratio simply means the potential reward is big relative to the potential loss, not that the trade is more likely to succeed.
The formula
Risk = |Entry Price − Stop-Loss Price|Reward = |Take-Profit Price − Entry Price|Risk/Reward Ratio = Reward ÷ Risk
The calculator also computes the break-even win rate — the minimum percentage of trades that need to win for the strategy to avoid losing money over time, ignoring fees:
Break-Even Win Rate = Risk ÷ (Risk + Reward) × 100Why win rate matters just as much
A 1:3 risk/reward ratio sounds attractive, but if the strategy only wins 15% of the time, it will still lose money overall. Conversely, a 1:1 ratio can be very profitable if the win rate is consistently above 55–60%. The ratio and the win rate are two halves of the same equation — neither one tells the full story alone.
This is why the break-even win rate is useful: it converts an abstract ratio into a concrete question you can test against your own trading history — "Do I actually win more often than this percentage with this kind of setup?"
Ratio and win rate combine into a single number called expectancy — the average amount you'd expect to make or lose per trade, in units of risk: Expectancy = (Win Rate × Reward) − (Loss Rate × Risk). A positive expectancy means the strategy is profitable over a large enough sample of trades, even though any individual trade can still lose. Expectancy is what ties the ratio and the win rate together into one figure you can actually compare across different strategies.
Worked example
You buy at $100, place a stop-loss at $97, and a take-profit at $109.
- Risk = $100 − $97 = $3
- Reward = $109 − $100 = $9
- Ratio = $9 ÷ $3 = 3, written as 1:3
- Break-even win rate = 3 ÷ (3 + 9) × 100 = 25%
With this setup, you only need to win one trade in four to break even before costs. Any win rate meaningfully above 25%, sustained over enough trades, would produce a net profit.
Common mistakes
- Chasing high ratios at the expense of a realistic take-profit. Setting a take-profit far beyond where price realistically reaches lowers your real-world win rate, even if the ratio on paper looks appealing — see our stop loss and take profit guide for a practical placement framework.
- Ignoring transaction costs. Spread, commissions and slippage all raise the effective break-even win rate above the theoretical number.
- Comparing ratios across different strategies without win-rate data. A 1:1 strategy with a 65% win rate can outperform a 1:3 strategy with a 20% win rate.
Frequently asked questions
What is a good risk/reward ratio?
There is no single good ratio — it depends on your win rate. A 1:2 ratio only needs to win above roughly 33% of the time to break even, while a 1:1 ratio needs to win above 50% of the time. A higher ratio lowers the win rate required for profitability.
Can a strategy be profitable with a risk/reward ratio below 1:1?
Yes, if the win rate is high enough to offset the smaller reward relative to risk. Risk/reward and win rate always need to be evaluated together, never in isolation.
How is the break-even win rate calculated?
Break-even win rate equals Risk divided by the sum of Risk and Reward, multiplied by 100. For a 1:2 ratio, that is 1 divided by 3, or roughly 33.3%.
Try the Risk/Reward Calculator
Related guides and tools
- Run your own numbers in the risk/reward calculator, or browse all trading calculators.
- Read How to Calculate Position Size to turn a risk percentage into a trade size.
- Read Setting Stop Loss and Take Profit Levels to build a target from your chosen ratio.
- Read Risk Management in Trading to see how risk/reward fits alongside sizing and loss limits.
- Read the Trading Drawdown guide to see how long losing streaks affect low win-rate strategies.
- See every topic in the guides library.
About the author
SOFTYTOOLS Editorial Team writes and maintains the calculators and guides on this site, focusing on clear, formula-based explanations of trading and investing concepts rather than opinion or speculation.