What Is Risk Reward Ratio in Trading? Formula, Examples and Win Rate Math
Risk/reward ratio is the single most important metric in trading. Learn what it means, how to calculate it, and the win rate you actually need to be profitable.
What is the Risk/Reward Ratio?
The risk/reward ratio (R:R) compares the amount you stand to lose on a trade (your risk) to the amount you stand to gain (your reward). A 1:3 R:R means you're risking $1 to potentially make $3.
The Simple Formula
R:R = (Target Price − Entry Price) / (Entry Price − Stop Loss Price)
Or use our free Risk/Reward Calculator to compute it instantly.
Win Rate Required to Break Even
Here is the rule of thumb every trader should memorize:
- 1:1 R:R → need 50%+ win rate
- 1:2 R:R → need 33%+ win rate
- 1:3 R:R → need 25%+ win rate
Why Win Rate Is Overrated
A trader winning 70% of the time with a 1:0.5 R:R loses money long term. A trader winning 35% of the time with a 1:3 R:R is highly profitable. The math always favors larger winners than losers.
Putting It Into Practice
- Define your stop loss before entering.
- Set a realistic target based on structure (resistance, prior swing, ATR).
- Reject trades with R:R below 1:1.5.
Cut losses fast, let winners run. Everything else is detail.
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