What the reward-to-risk ratio tells you
The ratio compares what a trade can make to what it can lose. A stop 20 pips away and a target 40 pips away is 1 : 2, often written as 2R: you risk one unit to make two.
Reward to risk = Distance to target ÷ Distance to stop
On its own the ratio says nothing about whether a trade is good. A 1 : 5 trade that almost never reaches its target loses money; a 1 : 1 trade that wins 60% of the time makes money. The ratio matters because of what it does to the win rate you need.
The break-even win rate
Break-even win rate = 1 ÷ (1 + Reward to risk)
| Reward to risk | Break-even win rate |
|---|---|
| 1 : 0.5 | 66.7% |
| 1 : 1 | 50.0% |
| 1 : 1.5 | 40.0% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25.0% |
| 1 : 4 | 20.0% |
At 1 : 2 you only need to win a third of your trades to break even. At 1 : 0.5, where you risk 20 pips to make 10, you need to win two trades in three. That's why traders who take small profits and let losses run can lose money while winning most of their trades.
Expected result per trade
Put the ratio and your real win rate together and you get the expectancy: the average result per trade, measured in R, units of risk.
Expectancy (R) = Win rate × Reward to risk − (1 − Win rate)
| Win rate | Reward to risk | Expected result per trade | Expected over 100 trades at $100 risk (before costs) |
|---|---|---|---|
| 60% | 1 : 1 | +0.20 R | +$2,000 |
| 40% | 1 : 2 | +0.20 R | +$2,000 |
| 30% | 1 : 3 | +0.20 R | +$2,000 |
| 25% | 1 : 3 | 0 R | $0 |
| 60% | 1 : 0.5 | −0.10 R | −$1,000 |
A 30% win rate at 1 : 3 has the same edge as 40% at 1 : 2 and 60% at 1 : 1. Drop to 25% at 1 : 3 and the edge is gone. And a 60% win rate loses money if the winners are half the size of the losers. Your win rate has to come from your own trades, not from the setup you hope for. A trading journal gives you that number.
Why the spread changes the ratio
Charts usually show the bid price, and you buy at the ask. If you choose your stop and target on the chart, a buy starts one spread behind: the target pays the spread less and the stop costs the spread more. With a 10-pip stop, a 20-pip target and a 1-pip spread, 1 : 2 becomes 19 ÷ 11, about 1 : 1.73, and the break-even win rate rises from 33.3% to 36.7%. On a sell the spread works the other way round: the position closes at the ask, so price on a bid chart has to travel further to reach your target and less far to reach your stop. Either way the spread is a cost on every trade. Put it into the calculator to see your real numbers. The tighter your stop, the more it matters.
Setting stops and targets that make sense
- Stop first, from the chart. Put it where the trade idea is proven wrong, such as beyond the last swing, not at a distance chosen to make the ratio look good.
- Target at a real level. The next swing, a round number or a previous high. A target in empty space is a hope, not a plan.
- Then check the ratio. If the honest target gives less than about 1 : 1.5, many traders skip the trade rather than move the levels.
- Then size the trade. The ratio doesn't set your risk; your lot size does. The lot size calculator turns a stop distance into a lot size for your risk.
Gold and indices
For gold the calculator counts pips as $0.10 moves, so a stop from 4,286.20 to 4,280.70 is 55 pips, and each pip on 1 lot is $10. Some brokers count a gold pip as $0.01. That makes the pip count ten times larger and the value per pip ten times smaller, so the money at risk and the ratio don't change. Gold pip value explains both. For indices the calculator uses points and $1 per point per lot, which matches a contract size of 1; if your broker's index contract is a different size, the ratio is the same but the money scales with it.
On a prop firm account
Reward to risk doesn't change the firm's rules. A 1 : 3 trade that risks 3% of the account can still break a 5% daily limit after two losses. Keep the risk per trade small, then look for good ratios within it. The prop firm drawdown calculator shows how many losing trades your limits allow.