Risk-to-reward is a simple idea with a big impact: comparing what you risk on a trade to what you aim to gain. Master it, and you can be profitable over time without winning every trade.
What it means
If you risk 20 pips to make 40, that’s a 1:2 risk-to-reward ratio, your potential reward is twice your risk. The ratio is set by where you place your stop loss and your take profit.
Why it matters more than win rate
With a 1:2 ratio, you can lose more trades than you win and still come out ahead, because your winners are bigger than your losers. Chasing a high win rate with poor ratios often does the opposite.
A quick illustration
Say you make ten trades risking one unit each to gain two. Even if only four win, you gain 8 units and lose 6, a net gain, despite a 40% win rate. That’s the power of favourable risk-to-reward.
How to use it
- Before entering, check the reward justifies the risk, ideally at least 1:1.5 or 1:2.
- Set your stop and target to define the ratio up front.
- Don’t move your stop to rescue a bad trade, it destroys your ratio.
- Track your ratios over time to see what’s working.
- Risk-to-reward compares what you risk to what you aim to gain
- Favourable ratios let you profit without a high win rate
- Set the ratio with your stop loss and take profit, before entering
- Keep targets realistic for the ratio to mean anything
This guide is educational only and is not investment advice or a promise of profit. Trading involves significant risk and may result in the loss of your capital.