Risk/Reward Ratio
Risk/reward ratio defines your potential profit vs potential loss. It’s your mathematical edge.
Risk/Reward Formula
R:R Ratio = Potential Reward ÷ Potential Risk
Example:
Entry: 1.1000
Stop: 1.0950 (50 pips risk)
Target: 1.1100 (100 pips reward)
R:R = 100 ÷ 50 = 2:1
Minimum R:R Requirements
| Win Rate | Break Even R:R | Minimum Recommended |
|---|---|---|
| 70% | 0.43:1 | 0.5:1 |
| 60% | 0.67:1 | 1:1 |
| 50% | 1.00:1 | 1.5:1 |
| 40% | 1.50:1 | 2:1 |
| 30% | 2.33:1 | 2.5:1 |
Rule: Never take trades with R:R below 1:1.
R:R Examples
1:1 R:R
Entry: 100
Stop: 95 ($50 risk)
Target: 105 ($50 reward)
Result: Even over time
2:1 R:R
Entry: 100
Stop: 95 ($50 risk)
Target: 110 ($100 reward)
Result: Profitable over time
3:1 R:R
Entry: 100
Stop: 95 ($50 risk)
Target: 115 ($150 reward)
Result: Highly profitable
Win Rate and R:R
| Required Win Rate | For | R:R Target |
|---|---|---|
| 50% | Breakeven | 1:1 |
| 40% | $0.33 profit/trade | 1.5:1 |
| 33% | $1.00 profit/trade | 2:1 |
| 20% | $0.60 profit/trade | 3:1 |
Average Expectancy
Expectancy = (Win Rate × Avg Win) - (Loss Rate × Avg Loss)
Example:
Win Rate: 50%
Avg Win: $100
Avg Loss: $50
Expectancy = (0.50 × $100) - (0.50 × $50) = $25
Common Mistakes
1. Taking Low R:R
Problem: Taking trades below 1:1.
Result: Lose over time.
Fix: Only take 1.5:1 or better.
2. No Target
Problem: No defined target.
Result: Leaving money on table.
Fix: Set target before trade.
3. Moving Target
Problem: Moving target to increase reward.
Result: Never satisfied.
Fix: Set target, leave it.
Key Takeaways
- Minimum 1:1 — Always
- 2:1 ideal — Sweet spot
- Win rate × R:R = Expectancy
- Calculate before trade — Then execute
- Don’t move targets — Set and forget
Related
stop-loss.md >>>
Mathematical edge first.