What you may lose to what you may gain:the ratio keeps the plan in frame.
The ratio between the potential loss and the potential gain on a trade: a ratio of 1:3 means the planned gain is three times the planned loss.
A ratio means something only alongside how often trades of that kind win, since a more distant target is reached less often.
In plain words
The risk-reward ratio compares what a trade stands to lose if it reaches its stop loss with what it stands to gain if it reaches its target. A ratio of 1:3 means the planned gain is three times the planned loss.
ratio = potential reward ÷ potential risk
See it move
Reward: the largest here
Why it matters
The ratio is tied to how often a trader needs to be right. At 1:3 one winning trade covers three losing ones, so the break-even point, before costs, is winning one trade in four.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A trader buys EUR/USD at 1.1000 with a stop loss at 1.0950 and a take profit at 1.1150.
- 1Risk1.1000 − 1.0950 = 50 pips.
- 2Reward1.1150 − 1.1000 = 150 pips.
- 3Ratio50 to 150, which is 1:3.
- 4Break-even win rate before costs1 ÷ (1 + 3) = 25%.
On one standard lot the plan risks 500 US dollars to aim for 1,500, a ratio of 1:3.
A common mistake
A bigger ratio is not automatically better. A target placed further away is reached less often, so the ratio means something only together with how often trades of that kind succeed. No particular ratio is the mark of a successful trader.
Check yourself
Learn more
- Academy lessonThe risk-reward ratioHow the risk-reward ratio and expectancy are calculated, the break-even win rate each ratio implies, and the mistakes that quietly change the ratio.
- GuideFive risk management rules for leveraged tradingRisk per trade, stop placement, the reward-to-risk arithmetic, correlated exposure and a written plan: five habits that limit how much a single mistake can cost.
Educational information, not investment advice or a recommendation to trade.