Risk Reward Ratio Explained
The risk/reward ratio is the most important metric for evaluating trade quality. Learn how to calculate it and why professional traders never take trades below 1:2.
Calculate your risk/reward ratio instantly with our profit calculator.
Open Profit CalculatorWhat is Risk/Reward Ratio?
The risk/reward ratio (also written as R:R, RRR, or risk-to-reward) compares the potential profit of a trade to its potential loss. It answers the question: "How much can I make for every dollar I risk?"
A risk/reward ratio of 1:2 means you stand to make $2 for every $1 you risk. A ratio of 1:3 means $3 profit for every $1 risked.
The Risk/Reward Formula
Calculating risk/reward is straightforward:
Risk/Reward Ratio = Potential Profit ÷ Potential LossOr in terms of price levels:
R:R = |Take Profit - Entry| ÷ |Entry - Stop Loss|Risk/Reward Calculation Examples
Example 1: Long Trade
Entry Price: $50,000
Stop Loss: $48,000 (risking $2,000 per BTC)
Take Profit: $56,000 (potential gain $6,000 per BTC)
R:R = $6,000 ÷ $2,000
Risk/Reward = 1:3
Example 2: Short Trade
Entry Price: 1.1000
Stop Loss: 1.1050 (risking 50 pips)
Take Profit: 1.0900 (potential gain 100 pips)
R:R = 100 pips ÷ 50 pips
Risk/Reward = 1:2
Why Risk/Reward Ratio Matters
The risk/reward ratio determines your required win rate to be profitable. Here's the math:
| Risk/Reward | Required Win Rate | Verdict |
|---|---|---|
| 1:1 | 50% | Breakeven |
| 1:2 | 33% | Good |
| 1:3 | 25% | Excellent |
| 1:4 | 20% | Outstanding |
With a 1:3 risk/reward ratio, you can be wrong 75% of the time and still break even. This is why professionals focus on finding high R:R setups rather than trying to be right on every trade.
What is a Good Risk/Reward Ratio?
Most professional traders have a minimum threshold of 1:2. This means they won't take any trade where the potential profit isn't at least twice the risk.
Some trading styles and their typical R:R ranges:
Scalping
R:R typically 1:1 to 1:1.5. Relies on high win rate (70%+) due to lower ratios.
Day Trading
R:R typically 1:2 to 1:3. Balances win rate with reward potential.
Swing Trading
R:R typically 1:3 to 1:5. Holds positions longer for bigger moves.
Position Trading
R:R can exceed 1:10. Targets major trend moves over weeks/months.
Using Multiple Take Profit Levels
Many traders use multiple take profit targets to optimize their average R:R while locking in profits along the way. A common approach:
- TP1 (50% of position): 1:1 - Lock in some profit
- TP2 (30% of position): 1:2 - Secure good returns
- TP3 (20% of position): 1:4+ - Let winners run
This strategy gives you an average R:R of around 1:1.8 while reducing the emotional impact of trades that reverse after being profitable.
Common Risk/Reward Mistakes
Mistake 1: Moving Stop Loss to Improve R:R
Never move your stop loss further away to create a better-looking R:R. The stop loss should be placed at a level where your trade thesis is invalidated, not to hit an arbitrary ratio.
Mistake 2: Ignoring Market Structure
A 1:10 R:R means nothing if your take profit is above a major resistance level. Always ensure your targets are realistic based on support/resistance, previous highs/lows, and market structure.
Mistake 3: Only Looking at R:R
Risk/reward is important, but it's not everything. A 1:5 R:R trade with 10% probability of success is worse than a 1:2 R:R trade with 60% probability. Consider the complete picture.
Expected Value: The Complete Picture
To truly evaluate a trade, combine R:R with your estimated win probability to calculate Expected Value (EV):
EV = (Win Rate × Reward) - (Loss Rate × Risk)Example:
Risk/Reward: 1:2 (risk $100 to make $200)
Win Rate: 50%
EV = (0.50 × $200) - (0.50 × $100)
EV = $100 - $50
Expected Value: +$50 per trade
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