Risk/Reward Ratio Explained (With Examples)
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What the risk/reward ratio measures
The risk/reward ratio (often abbreviated as R:R) compares how much you stand to lose on a trade against how much you stand to gain, based on your entry, stop-loss and take-profit levels. It is expressed as a ratio such as 1:2, meaning you are risking one unit of price movement to potentially gain two.
On its own, the ratio says nothing about whether a strategy is profitable. It only describes the shape of a single trade's potential outcome — a large ratio simply means the potential reward is big relative to the potential loss, not that the trade is more likely to succeed.
The formula
Risk = |Entry Price − Stop-Loss Price|Reward = |Take-Profit Price − Entry Price|Risk/Reward Ratio = Reward ÷ Risk
The calculator also computes the break-even win rate — the minimum percentage of trades that need to win for the strategy to avoid losing money over time, ignoring fees:
Break-Even Win Rate = Risk ÷ (Risk + Reward) × 100Why win rate matters just as much
A 1:3 risk/reward ratio sounds attractive, but if the strategy only wins 15% of the time, it will still lose money overall. Conversely, a 1:1 ratio can be very profitable if the win rate is consistently above 55–60%. The ratio and the win rate are two halves of the same equation — neither one tells the full story alone.
This is why the break-even win rate is useful: it converts an abstract ratio into a concrete question you can test against your own trading history — "Do I actually win more often than this percentage with this kind of setup?"
Worked example
You buy at $100, place a stop-loss at $97, and a take-profit at $109.
- Risk = $100 − $97 = $3
- Reward = $109 − $100 = $9
- Ratio = $9 ÷ $3 = 3, written as 1:3
- Break-even win rate = 3 ÷ (3 + 9) × 100 = 25%
With this setup, you only need to win one trade in four to break even before costs. Any win rate meaningfully above 25%, sustained over enough trades, would produce a net profit.
Common mistakes
- Chasing high ratios at the expense of a realistic take-profit. Setting a take-profit far beyond where price realistically reaches lowers your real-world win rate, even if the ratio on paper looks appealing — see our stop loss and take profit guide for a practical placement framework.
- Ignoring transaction costs. Spread, commissions and slippage all raise the effective break-even win rate above the theoretical number.
- Comparing ratios across different strategies without win-rate data. A 1:1 strategy with a 65% win rate can outperform a 1:3 strategy with a 20% win rate.
Frequently asked questions
What is a good risk/reward ratio?
There is no single good ratio — it depends on your win rate. A 1:2 ratio only needs to win above roughly 33% of the time to break even, while a 1:1 ratio needs to win above 50% of the time. A higher ratio lowers the win rate required for profitability.
Can a strategy be profitable with a risk/reward ratio below 1:1?
Yes, if the win rate is high enough to offset the smaller reward relative to risk. Risk/reward and win rate always need to be evaluated together, never in isolation.
How is the break-even win rate calculated?
Break-even win rate equals Risk divided by the sum of Risk and Reward, multiplied by 100. For a 1:2 ratio, that is 1 divided by 3, or roughly 33.3%.
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About the author
SOFTYTOOLS Editorial Team writes and maintains the calculators and guides on this site, focusing on clear, formula-based explanations of trading and investing concepts rather than opinion or speculation.