Risk-Reward Ratio Explained (And What’s a Good One)
You can be right less than half the time and still make money — or right most of the time and still lose it. The difference is the risk-reward ratio: how much you stand to gain on a trade compared to how much you’re risking. It’s the number that quietly decides whether a strategy is profitable over hundreds of trades. Here’s what it means and what counts as a good one. This is educational information, not financial advice.
Risk-reward ratio = potential profit ÷ potential loss. Risking $100 to make $200 is a 1:2 ratio. A good baseline is at least 1:2 — it means you only need to win about a third of your trades to break even. The higher your reward per unit of risk, the lower your win rate needs to be.
How to calculate it
The ratio compares the distance from your entry to your target against the distance from your entry to your stop-loss. If you buy at $100, set a stop at $95 (risking $5) and a target at $115 (aiming for $15), that’s a 1:3 risk-reward. You define both distances before entering — the stop from where the idea is invalid, the target from a realistic level. To size the position so that risk is a fixed slice of your account, run it through our position size calculator.
Why the ratio beats being “right”
New traders obsess over win rate — being right. But win rate and risk-reward work together, and the math is unforgiving. This table shows the win rate you need just to break even at different ratios:
| Risk-reward | Break-even win rate |
|---|---|
| 1:1 | 50% |
| 1:2 | ~33% |
| 1:3 | 25% |
| 1:5 | ~17% |
At 1:3, you can be wrong three times out of four and still not lose money. That’s why professionals hunt for high-reward setups rather than trying to be right all the time — it takes the pressure off any single trade.
The catch: the ratio has to be realistic
You can’t just set a huge target to make the ratio look good. A 1:10 setup means nothing if price has no realistic path to that target before hitting your stop. A good ratio pairs a sensible target — a real level price is likely to reach — with a stop at genuine invalidation. Inflating the reward on paper doesn’t change what actually happens on the chart.
Frequently asked questions
What is a good risk-reward ratio?
At least 1:2 is a common baseline; many traders prefer 1:3 or better. Higher ratios let you profit even with a low win rate — as long as the target is realistic.
Can I be profitable with a low win rate?
Yes. At 1:3 risk-reward you only need to win about 25% of trades to break even, so a 35–40% win rate can be solidly profitable.
Does risk-reward matter more than win rate?
They work together, but a strong ratio gives you far more room for error. A great win rate with 1:1 or worse can still lose money after fees.
Aim for at least 1:2, keep the target realistic, and stop obsessing over being right on every trade — a good ratio does the heavy lifting. Pair it with disciplined sizing using our position size calculator. Educational only — not financial advice.