Risk reward ratio explained

What is risk reward?

Risk reward compares how much you may lose if the stop loss is hit with how much you may gain if the take profit is reached.

Simple formula

Risk reward = potential profit / potential loss

If your stop loss is 50 pips and your target is 100 pips, the setup has a 1:2 risk reward ratio.

Why it matters

A trader can be profitable with a win rate below 50% if average wins are meaningfully larger than average losses. The opposite is also true: a high win rate can still lose money if losses are too large.

Example

Account risk per trade: $100

Target reward: $200

Risk reward: 1:2

With 4 wins and 6 losses: wins add $800, losses subtract $600, net result is +$200 before costs.

Practical tips

Mark entry, stop loss and take profit before entering.

Avoid moving stop loss farther away after entry.

Do not force a 1:3 target if the chart structure does not support it.

Combine risk reward with position sizing.

Risk reward is a planning tool. It does not make a weak trade strong by itself.