What risk-reward ratio means
Risk-reward ratio is the amount you stand to gain compared to the amount you risk on a single trade. If your stop-loss represents 1 unit of risk and your target is 2 units away, your ratio is 1:2.
How it relates to win rate
With a 1:2 ratio, a 40% win rate is theoretically profitable over the long run. Win 4 out of 10 trades and lose 6, and if each win nets 2 units while each loss costs 1 unit, you’re still up 8 to 6.
In other words, "how often you’re right" matters far less than "how much you make when right versus how much you lose when wrong."
Common misconceptions
- A high win rate is automatically good — an 80% win rate with a 1:0.2 ratio means a single loss can wipe out four wins
- A good ratio alone is enough — even a great ratio is meaningless if you keep getting stopped out before reaching target
- You need to look at both metrics together to know your actual expected value
How to check your own ratio
If you log balance before/after each trade along with your stop and target levels, you can calculate your average risk-reward ratio directly after a period of time. Looking at your average ratio alongside your actual win rate tells you whether your current strategy has a profitable structure over the long run.
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