Risk/Reward Ratio
You can be right less than half the time and still get rich — or right most of the time and still go broke. The difference is the risk/reward ratio. This is the math that separates gamblers from professionals.
What R:R actually means
The risk/reward ratio compares how much you risk on a trade to how much you stand to gain. If you risk $100 to make $300, that's a 1:3 R:R. Traders express results in 'R' — multiples of the amount risked. Risking 1R to make 3R means a winner is +3R and a loser is −1R.
Why win-rate alone is meaningless
A 40% win-rate sounds terrible — until you pair it with R:R. At 1:3, 40 winners of +3R and 60 losers of −1R nets +60R. Meanwhile a 70% win-rate at 1:0.5 (risking 1R to make 0.5R) loses money. Expectancy, not win-rate, is what matters.
| Win rate | R:R | Expectancy / trade |
|---|---|---|
| 40% | 1:3 | +0.60R (profitable) |
| 50% | 1:2 | +0.50R (profitable) |
| 60% | 1:1 | +0.20R (profitable) |
| 70% | 1:0.5 | +0.05R (barely) |
| 80% | 1:0.25 | 0.00R (break-even) |
Set your stop and target before taking the trade, based on structure — not on how you feel once you're in. If a setup doesn't offer at least ~1:2, skip it.
The expectancy formula
Expectancy = (Win% × Avg Win) − (Loss% × Avg Loss). A positive number means a profitable system over a large sample. Your job isn't to win every trade — it's to keep expectancy positive and execute it consistently across hundreds of trades.
A great setup can still lose; a terrible one can win. Judge your process over a series of trades, never a single result.
Key takeaways
- R:R = amount risked vs amount targeted (think in R)
- Expectancy = (Win% × AvgWin) − (Loss% × AvgLoss)
- Low win-rate + high R:R can be very profitable
- Set stop & target BEFORE entering
- Aim for ≥ 1:2 · judge the series, not one trade
Test your knowledge
1. Risking $100 to make $300 is a risk/reward of…
2. What ultimately determines profitability?
Frequently asked questions
Many professionals avoid setups below ~1:2. It means even a sub-50% win-rate stays profitable, and it forces you to be selective.
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