Risk management
Risk/Reward Ratio: What's Actually Good?
By MarketsBench · Published · Updated · 3 min read
Step 4 of 6 in Trading Foundations.
A risk/reward ratio compares what a trade can lose against what it can make. The number itself is easy — the useful question is what win rate it demands, because a "good" ratio that your strategy cannot hit is worse than a modest one it clears comfortably.
Measuring it
From entry, stop and target:
Risk = |entry − stop| · Reward = |target − entry| · Ratio = reward ÷ risk
Buying at $100 with a stop at $95 and a target at $115 gives $5 of risk against $15 of reward — a 3:1 ratio.
Traders usually express results in R multiples, where 1R is the risk on the trade. That trade wins 3R or loses 1R. R notation is worth adopting early: it makes results comparable across instruments and account sizes, so a 2R win in forex and a 2R win in futures mean the same thing.
Breakeven win rate: the number that matters
Every ratio implies the win rate you need just to break even:
Breakeven win rate = 1 ÷ (1 + ratio)
| Risk/reward | Breakeven win rate | Comment |
|---|---|---|
| 1:2 (0.5) | 66.7% | Needs to be right two times in three |
| 1:1 | 50.0% | The coin-flip line |
| 2:1 | 33.3% | Can be wrong twice as often as right |
| 3:1 | 25.0% | Comfortable, if the targets actually fill |
| 5:1 | 16.7% | Trend-following territory |
Read the table in both directions. A scalping strategy that wins 70% of the time is perfectly viable at 1:2, because it only needs 66.7%. A breakout strategy that wins 30% of the time needs at least 2.33:1 to survive.
Why 3:1 can still lose money
Because breaking even is not the goal. Expectancy is:
Expectancy (in R) = (win rate × ratio) − (loss rate × 1)
A 3:1 setup taken at a 15% win rate:
(0.15 × 3) − (0.85 × 1) = 0.45 − 0.85 = −0.40R
Every trade destroys 0.4R on average. Risking 1% per trade, that is a 0.4% expected loss per trade — a reliable way to lose an account slowly while believing you have excellent risk management.
The ratio and the win rate are not independent. Pushing your target further out raises the ratio and lowers the hit rate, because price has to travel further before something goes wrong. Traders who chase high ratios by simply moving targets away usually find their win rate falls faster than the ratio rises.
What to target in practice
There is no universal number. Match it to how the strategy behaves:
- Mean reversion / scalping — 0.5:1 to 1.5:1, carried by a high win rate. The trade is fading an extreme, and extremes do not travel far.
- Swing trading structure — 1.5:1 to 3:1. The usual sweet spot: targets set at real levels that price reaches often enough.
- Breakout and trend following — 3:1 and up, with win rates of 30–40%. Most trades fail small; a few pay for everything.
Two practical rules. First, set the target where the chart offers resistance, not where the arithmetic looks tidy — a target invented to reach 3:1 is a target that will not fill. Second, subtract costs before judging the ratio: spread, commission and slippage typically cost 0.05–0.15R per trade, which turns a marginal edge into a negative one.
Audit your own numbers
Ratios you plan are not ratios you get. Winners get closed early out of nerves, losers get held past the stop, and the realised ratio drifts below the planned one.
Log every trade with its planned R and its actual R. After 50 trades, compare the two averages. If planned 3:1 is coming out as realised 1.4:1, the problem is not the strategy's ratio — it is trade management, and no amount of target adjustment will fix it.