Risk-Reward Ratio: How to Calculate It and the Win Rate You Need
The risk-reward ratio compares what a trade can lose with what it can make: the distance to the stop-loss against the distance to the take-profit. A 20-pip stop and a 40-pip target is 1:2, which breaks even if 33.3% of trades win, before costs.
By calc.forex · Updated · 7 min read · How we check our numbers
Key takeaways
- Risk-reward ratio = distance to the stop-loss : distance to the take-profit. A long EUR/USD at 1.1000 with a stop at 1.0980 and a target at 1.1040 risks 20 pips to make 40: 1:2.
- Break-even win rate = 1 ÷ (1 + R), where R is reward ÷ risk: 50% at 1:1, 33.3% at 1:2 and 25% at 1:3, before costs.
- The ratio is the same in pips and in money, because the lot size multiplies both sides. Lot size sets how much money is at stake; the stop and the target set the ratio.
- Costs lower the ratio. A 20-pip stop and a 40-pip target with 1.9 pips of spread and commission is effectively 1:1.74, and the break-even win rate rises from 33.3% to 36.5%.
- A higher ratio is not better on its own: 60% winners at 1:1, 40% at 1:2 and 30% at 1:3 all average +0.2R per trade.
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How to calculate the risk-reward ratio
The risk-reward ratio of a trade compares the amount you stand to lose if the stop-loss is hit with the amount you stand to make if the take-profit is hit. Both are measured from the entry price.
Reward = distance from entry to take-profit
Risk-reward ratio = Risk : Reward, and R = Reward ÷ Risk
For a long trade the stop is below the entry and the target above it; for a short, the other way round. A ratio of 1:2 means you risk one unit to make two. Traders write it either way round: as risk:reward (1:2) or as reward:risk (2:1, or "2R"). Both describe the same trade, so check the order before comparing a figure with yours. This guide writes risk first and uses R for reward ÷ risk.
You can measure both distances in price, in pips or in money. On a single instrument the answer is the same, because the pip value and the lot size multiply the risk and the reward equally.
Worked examples
EUR/USD long, USD account
A $10,000 account risking 1%. Buy at 1.1000 with a stop at 1.0980 and a target at 1.1040.
| Step | Calculation | Result |
|---|---|---|
| Risk | (1.1000 − 1.0980) ÷ 0.0001 | 20 pips |
| Reward | (1.1040 − 1.1000) ÷ 0.0001 | 40 pips |
| Ratio | 20 : 40 | 1:2 (R = 2) |
| Break-even win rate | 1 ÷ (1 + 2) | 33.3% |
| Lot size for $100 of risk | $100 ÷ (20 × $10) | 0.50 lots |
| Risk and reward in money | 20 × $5 and 40 × $5 | $100 and $200 |
USD/JPY short, USD account
USD/JPY is at 150.00. Sell at 150.00 with a stop at 150.30 and a target at 149.25, risking $100.
| Step | Calculation | Result |
|---|---|---|
| Risk | (150.30 − 150.00) ÷ 0.01 | 30 pips |
| Reward | (150.00 − 149.25) ÷ 0.01 | 75 pips |
| Ratio | 30 : 75 | 1:2.5 (R = 2.5) |
| Break-even win rate | 1 ÷ (1 + 2.5) | 28.6% |
| Pip value per lot | ¥1,000 ÷ 150 | $6.67 |
| Lot size | $100 ÷ (30 × $6.6667) | 0.50 lots |
| Risk and reward in money | 30 × $3.3333 and 75 × $3.3333 | $100 and $250 |
The money figures use the pip value at 150.00. The yen result is converted at the rate when the trade closes, so the realised amounts differ slightly: $99.80 if the stop at 150.30 is hit and $251.26 if the target at 149.25 is reached. The ratio in pips does not change.
Gold (XAU/USD), 0.01 lots
Buy gold at $4,000.00 with a stop at $3,990.00 and a target at $4,030.00, trading 0.01 lots (1 oz).
| Step | Calculation | Result |
|---|---|---|
| Risk | $4,000.00 − $3,990.00 | $10.00 (100 pips of $0.10) |
| Reward | $4,030.00 − $4,000.00 | $30.00 (300 pips) |
| Ratio | 10 : 30 | 1:3 (R = 3) |
| Break-even win rate | 1 ÷ (1 + 3) | 25.0% |
| Risk and reward on 0.01 lots | 1 oz × $10 and 1 oz × $30 | $10 and $30 |
| Risk and reward on 0.10 lots | 10 oz × $10 and 10 oz × $30 | $100 and $300 |
The ratio is identical in dollars of price, in pips of either gold convention, and in money at any lot size, which is why it is easiest to work out from the prices.
Break-even win rate and expectancy
Expectancy (R per trade) = Win rate × R − (1 − Win rate)
The break-even win rate is the share of trades that must reach the target for the strategy to make nothing and lose nothing. Expectancy is the average result per trade, in multiples of the amount risked.
| Risk : reward | R | Break-even win rate | Expectancy at a 40% win rate |
|---|---|---|---|
| 1:0.5 | 0.5 | 66.7% | −0.40R |
| 1:1 | 1 | 50.0% | −0.20R |
| 1:1.5 | 1.5 | 40.0% | 0.00R |
| 1:2 | 2 | 33.3% | +0.20R |
| 1:3 | 3 | 25.0% | +0.60R |
| 1:4 | 4 | 20.0% | +1.00R |
A strategy makes money only if its win rate is above the break-even rate for the ratio it actually achieves. At a 40% win rate, 1:1.5 breaks even, 1:2 earns an average of 0.2R per trade (0.2% of the account per trade at 1% risk), and 1:1 loses.
How spread and commission change the ratio
Costs are paid on every trade, so they make each loss bigger and each win smaller. With a round-turn cost of c pips:
Break-even win rate = (Risk + c) ÷ (Risk + Reward)
| Trade (stop / target) | Round-turn cost | Effective ratio | Break-even win rate |
|---|---|---|---|
| EUR/USD 20 / 40 pips | 1.9 pips | 1:1.74 | 33.3% becomes 36.5% |
| EUR/USD 10 / 20 pips | 1.9 pips | 1:1.52 | 33.3% becomes 39.7% |
| USD/JPY 30 / 75 pips | 2.55 pips | 1:2.23 | 28.6% becomes 31.0% |
| Gold $10 / $30 (100 / 300 pips) | 3 pips ($0.30 spread) | 1:2.88 | 25.0% becomes 25.8% |
The tighter the stop, the larger the share of the risk that goes on costs, which is why short-term strategies need a noticeably higher win rate than their nominal ratio suggests. The trading costs guide shows how to turn spread and commission into pips.
Why a higher ratio is not automatically better
A distant target is reached less often than a near one, so raising the ratio usually lowers the win rate. What matters is the combination:
| Win rate | Risk : reward | Expectancy per trade |
|---|---|---|
| 60% | 1:1 | +0.20R |
| 40% | 1:2 | +0.20R |
| 30% | 1:3 | +0.20R |
All three earn the same on average, but they are very different to trade. The 30% strategy loses seven trades in ten and has much longer losing streaks, which are harder to sit through and call for smaller risk per trade. The 60% strategy has shorter streaks, but its wins are small, so costs take a bigger share of them. The risk management guide shows how long losing streaks get at different win rates.
Setting the stop and the target
- Place the stop where the trade idea is proven wrong: beyond a swing point, outside the normal noise measured by ATR, or wherever your rules say.
- Place the target where price can realistically get to within the time you plan to hold: a prior high or low, a pivot level or a Fibonacci extension.
- Calculate the ratio. If it is below what your win rate needs, skip the trade rather than moving the stop closer or the target further away to make the numbers work.
- Size the position from the stop distance with the lot size formula, so the loss at the stop is the amount you chose to risk.
Partial exits and trailing stops change the ratio you actually get. If you close half the position at 1R and let the rest run to 3R, a full winner averages 2R, not 3R. Measure the ratio from your closed trades, not from the plan.
Common risk-reward mistakes
- Judging the ratio without the win rate. 1:3 with 20% winners loses money: 0.20 × 3 − 0.80 = −0.20R per trade.
- Squeezing the stop to improve the ratio. A stop inside the normal noise is hit more often, so the win rate falls further than the ratio rises.
- Ignoring costs. On a 10-pip stop, 1.9 pips of spread and commission turns 1:2 into about 1:1.5.
- Mixing up 1:2 and 2:1. Risk:reward and reward:risk are written in opposite orders.
- Measuring to a target you never hold to. If you usually close early, the planned ratio overstates the real one.
- Widening the stop on an open trade. Moving a stop from 20 to 40 pips at the same size doubles the risk and halves the ratio.
Frequently asked questions
What is a good risk-reward ratio?
There is no single good ratio; it has to be judged together with the win rate. Many traders aim for 1:2 or better, which breaks even at a 33.3% win rate before costs. A 1:1 ratio works if clearly more than half of the trades win after costs.
How do you calculate the risk-reward ratio?
Compare the distance from entry to stop-loss with the distance from entry to take-profit. Buying EUR/USD at 1.1000 with a stop at 1.0980 and a target at 1.1040 risks 20 pips to make 40, a ratio of 1:2 (R = 2).
What does a 1:3 risk-reward ratio mean?
You risk one unit to make three: for example a $10 stop and a $30 target on gold, or $100 at risk for $300 of potential profit. It breaks even if 25% of trades win, before costs.
What win rate do I need for a 1:2 risk-reward ratio?
1 ÷ (1 + 2) = 33.3% before costs. With a 20-pip stop, a 40-pip target and 1.9 pips of spread and commission, it rises to about 36.5%.
Does lot size change the risk-reward ratio?
No. Lot size multiplies the risk and the reward by the same amount, so 0.01 lots and 1.00 lot with the same stop and target have the same ratio. Lot size only decides how much money is at stake.
Is risk-reward the same as reward-risk?
They describe the same trade in opposite orders. A 1:2 risk:reward ratio is a 2:1 reward:risk ratio, also written as 2R. Check which order a figure uses before comparing it with your own.