Risk-reward ratio is the single most important number in a trade plan — and the one beginners most often ignore. Get it right and you can be wrong more than half the time and still come out ahead.
What it is
Risk-reward (R:R) compares how much you stand to lose if your stop is hit to how much you stand to gain if your target is reached.
- Risk $100 to make $280, and your ratio is 1 : 2.8.
- The "1" is your risk unit — your R. Targets are then measured in multiples of R.
Why it changes everything
Win rate alone tells you nothing. What matters is the breakeven win rate — how often you need to be right just to stand still at a given ratio:
- 1 : 1 — you need to win 50% of trades to break even.
- 1 : 2 — you only need ~33%.
- 1 : 3 — you only need ~25% (about 1 in 4).
With a 1 : 1 ratio you must win more than half just to cover costs. At 1 : 3, you can be wrong three times out of four and still come out flat. This is why a sound process survives plenty of losing trades: the winners are bigger than the losers.
How to use it
- Set the stop first — where is your idea wrong? That defines your risk.
- Find the target — the next logical level. If the reward isn't worth the risk, skip the trade.
- Demand a minimum — many traders won't take anything below 1 : 1.5 or 1 : 2.
Every complete trading signal should state its R:R up front. Run the numbers on your own trades with the risk/reward calculator.
You can't control whether a trade wins. You can control whether it was worth taking.
Education only — not financial advice.