The risk-reward ratio

The risk reward ratio is one of the most important concepts in forex risk management. It measures the potential profit of a trade relative to its potential loss, helping traders evaluate whether a trade is worth taking.

What is the risk-reward ratio?

The risk reward ratio (R:R) compares the distance from your entry price to your stop-loss (risk) against the distance from your entry to your take-profit (reward). It is expressed as a ratio — for example, 1:2 means you are risking $1 to potentially make $2.

The formula is simple:

R:R Ratio = (Entry Price - Stop Loss) / (Take Profit - Entry Price)

For a buy trade with an entry at 1.1000, stop-loss at 1.0950, and take-profit at 1.1100: Risk = 50 pips, Reward = 100 pips, R:R ratio = 1:2.

Why a minimum 1:2 ratio matters

Many traders set a minimum risk-reward ratio of 1:2. Here is why this matters for your risk management:

• With a 1:2 R:R, you only need to win 34% of your trades to break even.
• With a 1:3 R:R, you only need to win 25% of your trades to break even.
• With a 1:1 R:R, you need to win more than 50% of your trades just to cover spreads and commissions.

These figures are arithmetic, not a recommendation. The 1:2 minimum is a convention: it shows how a ratio and a win rate offset each other, but a more distant target is reached less often, so raising the ratio usually lowers the win rate, and neither number is known in advance. The risk-reward calculator shows the break-even win rate for any ratio, and the Risk Room shows what a run of losses does to an account.

The expectancy formula

The expectancy formula quantifies the average amount you can expect to win or lose per trade over time:

Expectancy = (Win Rate × Average Win) - (Loss Rate × Average Loss)

For example, if your win rate is 45%, average win is $200, and average loss is $100:

Expectancy = (0.45 × $200) - (0.55 × $100) = $90 - $55 = $35 per trade

A positive expectancy means the rules were profitable, before costs, over the trades measured. The expectancy formula demonstrates why a good risk reward ratio can compensate for a lower win rate.

Common R:R mistakes

Avoid these common trading risk mistakes related to R:R:

• Moving your stop-loss further away to avoid being stopped out — this destroys your planned R:R ratio.
• Taking profit too early — cutting winners short undermines the mathematical advantage of a favorable R:R.
• Ignoring realistic targets — setting unrealistic take-profit levels to artificially inflate your R:R leads to trades that rarely hit their targets.
• Not accounting for spreads — especially on shorter timeframes, spreads can significantly reduce your effective reward ratio.

Applying R:R in practice

To implement effective forex risk management with the R:R ratio:

• Always calculate your R:R before entering any trade.
• Under the 1:2 convention, a trade that offers less than that ratio is passed over. This is an example of a rule, not a recommendation.
• Place stop-losses at logical levels (below support or above resistance), not at arbitrary distances.
• Set take-profit targets at realistic levels based on previous price action and key levels.
• Track your actual R:R over time and adjust your strategy to maintain a positive expectancy.

Revised 4 October 2026. The 1:2 minimum was presented as a rule to be obeyed. It is now described as a convention and an example, with what the arithmetic does not show.