Two traders. Same $10,000 account. Same 100 trades.
Trader A risks $200 to make $100 on every trade. That's 1:2 reward-to-risk. Wins 40% of trades. After 100 trades, Trader A is up $8,000.
Trader B risks $100 to make $200 on every trade. That's 2:1 reward-to-risk. Wins 40% of trades. After 100 trades, Trader B is up $20,000.
Same win rate. Same account. Same number of trades. Wildly different results. The difference? Risk-reward ratio. One trader can't make money with a 60% win rate. The other gets rich with a 40% win rate. This single metric separates profitable traders from struggling ones. Here's how to use it to find winning trades.
What Is Risk-Reward Ratio?
The Definition
Risk-reward ratio compares how much you're risking to how much you're targeting to make.
Formula:
Target profit ÷ Risk amount = Risk-reward ratio
Example:
You buy at $100. Stop at $95. Target at $110.
Risk: $100 - $95 = $5
Reward: $110 - $100 = $10
Risk-reward ratio: $10 ÷ $5 = 2:1
You're risking $5 to make $10. That's 2:1.
Another example:
You buy at $50. Stop at $48. Target at $54.
Risk: $50 - $48 = $2
Reward: $54 - $50 = $4
Risk-reward ratio: $4 ÷ $2 = 2:1
Why It Matters
The math of trading:
Expectancy = (Win rate × Average win) - (Loss rate × Average loss)
Trader A:
- Win rate: 60%
- Average win: $100
- Average loss: $200
Expectancy = (0.60 × $100) - (0.40 × $200) = $60 - $80 = -$20 per trade
Loses money despite 60% win rate.
Trader B:
- Win rate: 40%
- Average win: $200
- Average loss: $100
Expectancy = (0.40 × $200) - (0.60 × $100) = $80 - $60 = +$20 per trade
Makes money with only 40% win rate.
The lesson: You don't need a high win rate to profit. You need a positive expectancy. Risk-reward ratio is the lever that moves expectancy.
The Break-Even Win Rate
For any risk-reward ratio, there's a break-even win rate—the win rate you need to not lose money.
Formula:
Break-even win rate = 1 ÷ (1 + Risk-reward ratio)
Examples:
1:1 risk-reward: 1 ÷ (1 + 1) = 50% break-even 2:1 risk-reward: 1 ÷ (1 + 2) = 33% break-even 3:1 risk-reward: 1 ÷ (1 + 3) = 25% break-even 4:1 risk-reward: 1 ÷ (1 + 4) = 20% break-even
What this means:
With 2:1 risk-reward, you only need to win 34% of trades to break even. Win 40% and you're profitable. Win 50% and you're printing money.
With 1:2 risk-reward (risking $2 to make $1), you need to win 67% of trades just to break even. Win 60% and you're losing money.
The takeaway: High risk-reward ratios make winning easier. Low risk-reward ratios make winning harder.
How to Calculate Risk-Reward Ratio
Step 1: Determine Your Entry
Your planned entry price.
Example: You want to buy XYZ stock at $100.
Step 2: Determine Your Stop Loss
Your planned stop price based on technical analysis—not based on how much you want to risk.
Example: Based on support at $95, you set your stop at $94.50.
Critical: Don't move your stop closer just to improve your risk-reward ratio. That's lying to yourself. Set your stop where technical analysis says it should be. If the risk-reward doesn't work, don't take the trade.
Step 3: Determine Your Target
Your planned exit price based on technical analysis—not based on how much you want to make.
Example: Based on resistance at $110, you set your target at $110.
Step 4: Calculate Risk
Entry price - Stop price = Risk (for longs)
Stop price - Entry price = Risk (for shorts)
Example: $100 - $94.50 = $5.50 risk
Step 5: Calculate Reward
Target price - Entry price = Reward (for longs)
Entry price - Target price = Reward (for shorts)
Example: $110 - $100 = $10 reward
Step 6: Calculate Ratio
Reward ÷ Risk = Risk-reward ratio
Example: $10 ÷ $5.50 = 1.82:1
Round to 1.8:1.
Is This Trade Worth Taking?
Your minimum threshold: 2:1
This trade offers 1.8:1.
Decision: Skip it. Wait for better setup with 2:1 or better.
What's a Good Risk-Reward Ratio?
The 2:1 Minimum
Most profitable traders use 2:1 as their minimum risk-reward ratio.
Why 2:1?
At 2:1, your break-even win rate is 33%. Win 35-40% and you're profitable. That's achievable.
At 1:1, your break-even is 50%. You need to win 55-60% consistently to profit. That's much harder.
At 3:1, your break-even is 25%. But 3:1 setups are rarer. If you wait for only 3:1, you'll miss many good opportunities.
2:1 is the sweet spot.
Reality Check by Market
Stocks:
- 2:1 to 3:1 is common and achievable
- 4:1+ exists but requires patience
- Below 2:1 usually not worth trading
Forex:
- 2:1 to 5:1 is achievable due to deep liquidity
- Major pairs can offer 3:1+ regularly
- Exotic pairs may offer even more but with higher risk
Futures:
- 2:1 to 3:1 typical
- Intraday scalps: 1.5:1 to 2:1
- Swing trades: 3:1 to 5:1+
Crypto:
- 3:1 to 10:1 possible due to volatility
- But slippage and volatility make execution harder
- 2:1 minimum, but realistic targets often higher
Reality Check by Timeframe
Day trading:
- 1.5:1 to 2:1 common
- Smaller moves in shorter timeframes
- More trades, smaller risk-reward per trade
Swing trading:
- 2:1 to 3:1 typical
- Larger moves over days/weeks
- Fewer trades, larger risk-reward per trade
Position trading:
- 3:1 to 5:1+ common
- Largest moves over weeks/months
- Fewest trades, largest risk-reward per trade
How to Find High Risk-Reward Trades
Method 1: Trade Key Levels
Setup: Price at major support or resistance. Clear next level in the direction of your trade.
Example (Long):
- Stock ABC at major support at $50
- Next resistance at $60 (clear, tested level)
- Logical stop below support at $48.50
Risk: $50 - $48.50 = $1.50 Reward: $60 - $50 = $10 Risk-reward: 10 ÷ 1.50 = 6.7:1
This is a home run setup.
Why it works: Key levels are where the big money positions. The distance between major levels often represents large percentage moves.
Method 2: Trade Breakouts with Measured Moves
Setup: Price breaks from a consolidation pattern. Target the measured move.
Example:
- DEF consolidates between $90 and $100 for 3 months (range height = $10)
- Price breaks above $100 with volume
- Measured move target: $100 + $10 = $110
- Stop below the breakout level at $98
Risk: $100 - $98 = $2 Reward: $110 - $100 = $10 Risk-reward: 10 ÷ 2 = 5:1
Why it works: Breakouts from ranges often move at least the height of the range. That's a standard technical pattern.
Method 3: Trade Pullbacks in Strong Trends
Setup: Strong trend. Price pulls back to a moving average or trendline. Target the previous high or next resistance.
Example:
- GHI in strong uptrend (above 200 SMA)
- Price pulls back to 50 EMA at $75
- Previous high at $85
- Stop below 50 EMA at $73.50
Risk: $75 - $73.50 = $1.50 Reward: $85 - $75 = $10 Risk-reward: 10 ÷ 1.50 = 6.7:1
Why it works: Strong trends often retest previous highs after pullbacks. The risk is small (tight stops below the MA) and the reward is large (trend resumption).
Method 4: Trade Reversals at Extremes
Setup: Overextended trend at major level. Reversal signal. Target the opposite extreme or halfway back.
Example:
- JKL overextended from $80 to $120 in 3 weeks (parabolic)
- Major resistance at $120 (previous high)
- Bearish engulfing at $120
- Target retracement to $100 (50% of the move)
- Stop above the reversal high at $122
Risk: $122 - $120 = $2 Reward: $120 - $100 = $20 Risk-reward: 20 ÷ 2 = 10:1
Warning: Reversals are risky. Failed reversals become continuations. Only take the clearest reversal setups at major levels with strong confirmation.
Method 5: Trade Chart Patterns
Bull Flags:
- Flag pole: Price rallies from $50 to $70 (20 point move)
- Flag: Price consolidates between $68 and $65
- Breakout above flag at $68
- Target: Flag pole height added to breakout = $68 + $20 = $88
- Stop below flag at $64
Risk: $68 - $64 = $4 Reward: $88 - $68 = $20 Risk-reward: 20 ÷ 4 = 5:1
Head and Shoulders:
- Neckline at $100
- Top at $120
- Breakdown below neckline at $100
- Target: $100 - ($120 - $100) = $80
- Stop back above neckline at $102
Risk: $102 - $100 = $2 Reward: $100 - $80 = $20 Risk-reward: 20 ÷ 2 = 10:1
Position Sizing and Risk-Reward
The Risk-Per-Trade Link
Risk-reward ratio doesn't tell you how much to risk. It tells you the relationship between your risk and your target.
You still need position sizing to control your actual dollar risk.
Example:
Trade A:
- Entry: $100, Stop: $95, Target: $110
- Risk per share: $5
- Risk-reward: 2:1
- Account: $10,000
- Risk per trade: 1% = $100
Position size: $100 ÷ $5 = 20 shares
Trade B:
- Entry: $100, Stop: $98, Target: $108
- Risk per share: $2
- Risk-reward: 4:1
- Account: $10,000
- Risk per trade: 1% = $100
Position size: $100 ÷ $2 = 50 shares
Result: Both trades risk $100 (1% of account). But Trade B offers 4:1 risk-reward vs Trade A's 2:1. Trade B is the better opportunity.
When to Increase Position Size
Only when:
- Risk-reward is higher than normal (3:1+)
- Setup quality is exceptional (A+ setup)
- Your conviction is higher (based on evidence, not emotion)
Example:
Your normal risk: 1% per trade.
You find a 5:1 setup. Everything aligns perfectly.
Consider increasing to 1.5% risk.
Warning: Never exceed 2% risk per trade, regardless of how good the setup looks. Edge cases happen. Black swans happen. Preserve your capital.
Common Risk-Reward Mistakes
Mistake 1: Faking Your Stop
Problem: You want to improve your risk-reward, so you place your stop closer than technical analysis justifies.
Example: Support is at $95. You enter at $100. Technical stop should be at $94.50.
But you place your stop at $98 to improve your risk-reward from 2:1 to 5:1.
Reality: Your stop will get hit. The market doesn't care about your risk-reward calculation. It cares about actual support/resistance levels.
Fix: Set your stop where technical analysis says it should be. If the risk-reward doesn't work, skip the trade.
Mistake 2: Unrealistic Targets
Problem: You set targets at levels price has no historical reason to reach.
Example: Stock has never traded above $105. Resistance at $105 is massive. You enter at $100 and set a target at $120.
Your risk-reward calculation says 4:1. Reality says you'll likely exit at $105.
Fix: Set targets at logical levels based on price history. Previous highs, measured moves, major resistance.
Mistake 3: Ignoring Volatility
Problem: You calculate risk-reward assuming you'll get filled perfectly at your entry, stop, and target.
Reality: In volatile markets, you get slippage. Your entries are worse. Your stops are worse. Your exits are worse.
Example:
Planned: Entry $100, Stop $95, Target $110. Risk-reward 2:1.
Actual: Entry $100.50, Stop at $94.50 (slipped), Exit at $109.50 (slipped).
Actual risk-reward: 1.6:1.
Fix: Build in a slippage buffer. If the calculated risk-reward is 2:1, assume real risk-reward is 1.8:1. Only take trades where the buffer still leaves you above your minimum.
Mistake 4: Not Exiting at Targets
Problem: You calculate 3:1 risk-reward. Price hits your target. You don't exit because "it can keep going."
Reality: Price reverses. You give back your profits. Maybe you even stop out.
Fix: When price hits your target, exit. At minimum, exit a portion (50-75%). Trail the rest with a stop. But take profits when you said you would.
Mistake 5: Letting Losers Run, Cutting Winners Short
Problem: You set your stop at $95. Price approaches $95. You move it to $93 "to give it room." Price hits $93. You move it to $90.
Meanwhile, your winners: You target $110. Price hits $108. You get nervous and exit at $108.
Result: You're turning 3:1 trades into 1:1. Or worse.
Fix: Never move stops away from risk. Never exit winners before targets. Let the market play out. If your setup and risk-reward calculation were solid, trust them.
Mistake 6: Cherry-Picking Examples
Problem: You backtest and find a strategy with 5:1 average risk-reward. But you only count the trades that worked perfectly. You ignore the ones where you got stopped out immediately or where you failed to follow the rules.
Reality: Real trading includes slippage, mistakes, emotions, and unavoidable losses.
Fix: When backtesting or journaling, count EVERY trade. Not just the good ones. Your real risk-reward is across all trades, not just the winners.
Advanced Techniques
Partial Profit Taking
Concept: Exit portions of your position at different targets to improve realized risk-reward.
Example:
You enter at $100. Stop at $95. Target at $110 (2:1).
Plan:
- Exit 50% at $105 (1:1 on that portion)
- Move stop to breakeven ($100)
- Exit remaining 50% at $110 (2:1 on that portion, now with zero risk)
Result: You locked in 1:1 on half and have a free ride on the other half to 2:1. Average realized risk-reward: 1.5:1 with zero risk after first target.
Why this works: Reduces regret, locks in profits, and gives you a free ride on the remaining position.
Trailing Stops to Extend Winners
Concept: Instead of a fixed target, trail your stop to let winners run beyond your initial target.
Example:
You enter at $100. Stop at $95. Initial target $110 (2:1).
Price reaches $110. Instead of exiting, you trail your stop at $105 (below the $110 level).
Price continues to $120. You trail stop to $115.
Price reverses, stops out at $115.
Result: You got 3:1 instead of 2:1.
Warning: Trailing stops requires skill. Too tight and you get stopped early. Too loose and you give back too much. Practice on sim first.
Scaling In
Concept: Enter portions of your position at better prices to improve overall risk-reward.
Example:
You want to buy XYZ with a target of $110. Support is at $95-$100 zone.
Instead of going all-in at $100:
- Enter 50% at $100
- Enter 50% at $97 (if price pulls back)
Average entry: $98.50
Stop: $94.50 (below support) Target: $110
Risk: $98.50 - $94.50 = $4 Reward: $110 - $98.50 = $11.50 Risk-reward: 11.50 ÷ 4 = 2.9:1
Result: You improved your risk-reward from 2:1 (at $100 entry) to 2.9:1 (with scaling).
Warning: If price doesn't pull back and you miss the trade, you miss it. Don't chase. If the full position doesn't get filled, accept it.
R-Multiples
Concept: Measure your results in risk units (R-multiples) instead of dollars or percent.
Definition:
1R = Your initial risk amount
Win 2R = You made 2x your risk Lose 1R = You lost your initial risk (normal stop out) Lose 0.5R = You exited early with half your normal loss
Example:
You risk $100 per trade (1% of $10,000 account).
Trade 1: Win $200 = +2R Trade 2: Lose $100 = -1R Trade 3: Win $150 = +1.5R Trade 4: Lose $50 (exited early) = -0.5R Trade 5: Win $300 = +3R
Total: +2 -1 +1.5 -0.5 +3 = +5R
Why R-multiples:
- Normalizes results across different trades
- Focuses on process over dollar amounts
- Makes you risk-aware
Target: Average 0.5R to 1R per trade over time. That's 50-100% return per 100 trades (assuming 1% risk per trade).
Practical Trading Rules
Rule 1: Minimum 2:1
Never take a trade with less than 2:1 risk-reward. Period.
Exception: You're scalping with very high win rate (60-70%) and tight stops. Even then, 1.5:1 minimum.
Rule 2: Target Based on Technicals
Set targets where price has historically reversed or paused. Previous highs/lows, measured moves, major resistance/support.
Don't set targets based on how much you want to make.
Rule 3: Stop Based on Technicals
Set stops where your setup is invalidated. Beyond support/resistance, beyond the pattern, beyond the moving average.
Don't set stops based on how much you're willing to lose.
Rule 4: Calculate Before You Enter
Calculate risk-reward before entering. If it doesn't meet your minimum, skip the trade.
No exceptions. No "I'll enter anyway and manage it."
Rule 5: Scale Out at Logical Levels
When price hits your first target (50-75% of position), exit a portion. Move stop to breakeven. Let the rest ride.
Lock in profits. Reduce stress. Improve your actual realized risk-reward.
Rule 6: Track Actual vs. Planned
Journal both your planned risk-reward (at entry) and your actual risk-reward (at exit).
If actual is consistently lower than planned, you're making execution mistakes:
- Exiting winners early
- Letting losers run
- Moving stops
Fix the execution. Don't blame the setup.
Rule 7: Win Rate × Risk-Reward = Expectancy
Track both your win rate and your risk-reward. Calculate your expectancy monthly.
If expectancy is positive, keep doing what you're doing.
If expectancy is negative, either:
- Improve your win rate (better entries, better setups)
- Improve your risk-reward (better targets, tighter stops)
- Improve your execution (follow your rules)
Key Takeaways
- Risk-reward ratio compares your target profit to your risk—the higher, the easier it is to profit
- Formula: Target profit ÷ Risk amount = Risk-reward ratio
- Break-even win rate at 2:1 is 33%—much easier than the 50% needed for 1:1
- Use 2:1 as your minimum risk-reward threshold for any trade
- Calculate risk-reward before entering; skip trades below your minimum
- Find high risk-reward trades at key levels, breakouts, pullbacks in trends, reversals at extremes, and chart patterns
- Set stops based on technical analysis (support, resistance, patterns)—not based on desired risk
- Set targets based on technical analysis (previous highs/lows, measured moves)—not based on desired profit
- Position size independently of risk-reward to control your actual dollar risk per trade
- Avoid common mistakes: faking stops, unrealistic targets, ignoring slippage, not exiting at targets, cutting winners short, letting losers run
- Use advanced techniques: partial profit taking, trailing stops, scaling in, R-multiples
- Follow practical rules: minimum 2:1, target/stop based on technicals, calculate before entry, scale out, track actual vs. planned
- Win rate × Risk-reward = Expectancy—improve either (or both) to improve profitability
- You don't need a high win rate to make money—you need a positive expectancy, which good risk-reward provides
Risk-reward ratio is the great equalizer. A trader with 40% win rate and 3:1 risk-reward makes more money than a trader with 60% win rate and 1:2 risk-reward. The first trader understands this math. The second trader doesn't.
Which trader are you?
Stop chasing win rates. Start chasing risk-reward.
Find setups where the market pays you 2-3x your risk. Take those setups systematically. Manage them wisely. Let the math work in your favor.
Your account balance will reflect it.
ChartMini automatically calculates risk-reward ratios for every setup, shows you only trades with 2:1 or better, and trails stops to maximize your realized risk-reward.