What is the risk-reward ratio? A beginner's guide
5 min read · Updated 9 October 2026 · How we write
The risk-reward ratio compares how much you stand to lose on a trade with how much you aim to gain. If you risk 10 to try to make 30, the ratio is 1 to 3. It's one of the first numbers a disciplined trader works out before entering.
How to calculate it
Take the distance from your entry to your stop loss (the risk) and the distance from your entry to your target (the reward). Divide the reward by the risk. Entry 100, stop 95, target 115 gives a risk of 5 and a reward of 15, so the ratio is 1 to 3.
Why win rate matters as well
A good ratio does not make a method profitable on its own. It works together with how often you win. With a 1 to 2 ratio, you break even if you win a third of your trades, before costs. With a 1 to 1 ratio you need to win more than half. The two numbers together show whether a method has an edge.
Costs change the maths
Spreads and commissions make every trade slightly worse than the ratio suggests. A trade targeting 1 to 1.2 can easily be losing once the costs are included, so include them in your numbers.
Setting realistic targets
A higher ratio isn't automatically better. A distant target is hit less often, so your win rate falls. Targets should come from the market, for example the next area where price has reversed before, not from a ratio you like.
Test it before relying on it
Use a practice account and a journal to record your real ratio and win rate over many trades. If the results don't match your assumptions, change the method, not the story.
This guide is education, not financial advice. It does not recommend buying or selling anything. Trading and investing can lose money.
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