Guide
Risk Reward Ratio Explained
Risk reward ratio compares the amount risked on a trade with the planned reward if the trade reaches its target.
The basic idea
A 1:2 risk reward ratio means the planned profit target is twice the size of the planned loss. In R terms, the trade risks 1R to target 2R.
This planned ratio helps estimate the win rate needed to break even, but it does not guarantee the average winner will actually be 2R.
Risk reward and break-even win rate
Higher planned reward relative to risk lowers the win rate required to break even before costs. Smaller planned reward relative to risk raises the required win rate.
| Risk reward | Target in R | Break-even win rate | Practical note |
|---|---|---|---|
| 1:0.5 | 0.5R | 66.7% | Needs frequent wins |
| 1:1 | 1.0R | 50.0% | Balanced profile |
| 1:1.5 | 1.5R | 40.0% | More room for losses |
| 1:2 | 2.0R | 33.3% | Can win less often |
| 1:3 | 3.0R | 25.0% | May have longer losing streaks |
Planned risk reward is not actual payoff ratio
Risk reward is usually planned before the trade. Payoff ratio is measured from actual average winners and actual average losers after trades are closed.
If targets are missed, trades are closed early, slippage appears or losses exceed planned risk, the actual payoff ratio can differ from the planned risk reward.
Risk reward does not replace expectancy
A 1:3 profile can still lose money if the win rate is too low. A 1:1 profile can still be profitable if the win rate is high enough and costs are controlled.
Use the expectancy calculator to combine win rate with average winner and average loser.
Why a bigger target is not automatically better
Moving from a 1:1 target to a 1:3 target may look better on paper, but the win rate may fall, trades may take longer and more winners may reverse before reaching target.
The useful question is not which ratio looks best. The useful question is which combination of win rate, average winner, average loser and execution quality creates the most durable expectancy.
How to test a risk reward profile
Start with the break-even win rate calculator. Then run the same win rate and reward/risk in the trading probability simulator.
The simulator shows whether the profile can create losing streaks or drawdowns that are difficult to tolerate before the average has enough time to appear.
Use actual results to verify the planned ratio
After enough trades, compare planned reward/risk with actual average win and actual average loss. If the planned target is 2R but the average winner is only 1.2R, the system should be evaluated with the actual result.
This is especially important when partial exits, early exits, slippage or oversized losses change the real payoff profile.
Frequently asked questions
What is risk reward ratio?
It is the planned reward on a trade compared with the planned risk. A 1:2 ratio means risking 1R to target 2R.
Is a higher risk reward always better?
No. A higher target can reduce win rate or make execution harder. It must be judged with actual win rate and expectancy.
Can planned risk reward differ from real results?
Yes. Early exits, missed targets, slippage, partial exits and larger-than-planned losses can make the actual payoff ratio different from the planned ratio.
What is the difference between risk reward and payoff ratio?
Risk reward is usually planned before entry. Payoff ratio is measured from actual average winners and losers after trades close.
Can a low risk reward strategy be profitable?
Yes, if the win rate is high enough and costs do not erase the edge.