Two traders can take the exact same trades and one ends up profitable while the other loses money. Often the difference isn't skill at picking direction — it's the risk-reward ratio. It's one of the simplest ideas in trading and one of the most powerful.
What the risk-reward ratio is
The risk-reward ratio compares how much you're risking on a trade to how much you're aiming to make.
- You risk the distance from your entry to your stop loss.
- You aim to gain the distance from your entry to your take profit (target).
Written as risk : reward, a 1:2 ratio means you're risking 1 to make 2 — for example, risking 20 pips to target 40. A 1:3 means risking 1 to make 3 — risking 20 pips to target 60.
Why it's so powerful
A good risk-reward ratio means you don't have to be right very often to come out ahead. Consider trading at 1:2 and risking the same amount each time:
- Win 4 trades, lose 6 → you gain 4 × 2 = 8 units, lose 6 × 1 = 6 units → net +2, even though you were wrong more often than right.
At 1:3, you can win only a third of your trades and still break even. This is the key insight: with a strong ratio, your winners more than pay for your losers. Chasing a high win rate matters far less than most beginners think.
Note
A high win rate with a poor ratio can still lose money. Win 7 of 10 trades at 1:0.5 (risking 20 to make 10) and your three losses can wipe out all seven wins. Ratio beats hit-rate.
How to set it
You build the ratio before you enter, in three steps:
- Place your stop where the trade idea is proven wrong (below support for a long, above resistance for a short).
- Place your target at a realistic level price could reach (the next resistance, a prior high).
- Check the ratio. Measure the distance to each. If the reward isn't at least about twice the risk, the trade may not be worth taking.
The order matters: set the stop and target based on the chart, then decide if the ratio is good enough — never widen your target just to make the numbers look nice.
What's a "good" ratio?
Many traders look for a minimum of 1:2, and often 1:3 on their best setups. There's no magic number, but the reward should clearly outweigh the risk. Trades where you'd risk more than you stand to gain (like 1:0.5) are usually skipped, no matter how tempting.
Risk
The risk-reward ratio only works if you honour your stop loss. Moving a stop further away to avoid being stopped out destroys your ratio and turns a small planned loss into a large one. Set it, then leave it.
It works alongside the 1% rule
Risk-reward and position sizing are partners. The 1% rule caps how much you risk per trade; the risk-reward ratio decides whether that risk is worth taking. Together they mean each trade risks a small, fixed amount — and only when the potential reward clearly justifies it.
How to practise
- On a demo chart, mark a realistic entry, stop, and target for a setup.
- Measure the risk and reward distances and write the ratio.
- Only "take" trades that offer at least 1:2.
- Track results on a demo account and see how a good ratio lets you profit without a high win rate.
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The bottom line
The risk-reward ratio compares what you risk to what you aim to gain — 1:2 means risking 1 to make 2. A strong ratio lets your winners outweigh your losers, so you can be wrong more often than right and still profit. Set your stop and target from the chart first, insist on at least 1:2, and always honour the stop.
Educational content only, not financial advice. Trading forex carries a high level of risk. Read our full affiliate disclosure.