Risk-reward ratio compares how much you're risking on a trade to how much you stand to gain if it works out. A 1:2 risk-reward ratio means you're risking $1 to potentially make $2. It's set before you enter a trade, and it directly determines the win rate you need just to break even.
The Risk-Reward Ratio Formula
Risk-Reward Ratio = Distance to Stop Loss ÷ Distance to Take Profit
If your stop loss is 20 pips away and your take profit target is 60 pips away, you're risking 20 to make 60 — a 1:3 risk-reward ratio. The smaller the risk relative to the reward, the fewer winning trades you need to stay profitable.
The Breakeven Win Rate a Risk-Reward Ratio Implies
Every risk-reward ratio has a matching breakeven win rate — the minimum win rate needed just to avoid losing money, before spread and commission.
- 1:1 ratio — needs a win rate above 50% to be profitable
- 1:2 ratio — needs a win rate above roughly 33%
- 1:3 ratio — needs a win rate above roughly 25%
This is why a trader with a 30% win rate and a 1:3 ratio can be far more profitable than a trader with a 60% win rate and a 1:1 ratio — the math of the ratio does more work than the frequency of being right.
Where Traders Get Risk-Reward Wrong
Chasing a high risk-reward ratio for its own sake is a common mistake — setting an unrealistic take profit target far beyond where price typically reaches doesn't create a good ratio, it just lowers your realistic win rate to match. A risk-reward ratio only helps if the reward target is one price actually reaches often enough, based on real market behavior for that setup, not an arbitrary multiple of your stop distance.
Risk-Reward Ratio vs. Expectancy
Risk-reward ratio is a plan for a single trade, set before you enter. Expectancy is the result across many trades, combining your actual win rate with your actual average win and loss sizes. A good risk-reward ratio on paper doesn't guarantee positive expectancy if your realized win rate doesn't support it — which is exactly why both numbers need to be tracked, not just planned.
See Your Real Risk-Reward Ratio, Not Just Your Planned One
LedgerPips tracks your actual risk-reward ratio per trade, session, and setup from your synced MT4/MT5 history — so you can see whether your realized numbers match what you planned.
Conclusion
Risk-reward ratio determines the win rate your strategy needs to survive — set it based on realistic price behavior, not an arbitrary target, and track your realized ratio against your planned one over time.
