By Marco BösingWhat Is the Risk-Reward Ratio?
The risk-reward ratio (RRR) expresses the relationship between the potential risk and the potential reward of a trade.
The formula is:
RRR = Potential Loss / Potential Gain
An RRR of 1:3 means: for every dollar risked, the trader expects a gain of three dollars. The stop loss is three times closer to the entry than the take-profit target.
Why Is the Risk-Reward Ratio So Important?
The risk-reward ratio is critical because, together with win rate, it determines the profitability of a trading system:
The Breakeven Win Rate
For every RRR, there is a minimum win rate at which the system becomes profitable:
| RRR | Required Win Rate |
|---|---|
| 1:1 | > 50% |
| 1:2 | > 33% |
| 1:3 | > 25% |
| 1:5 | > 17% |
A trader with an RRR of 1:3 can lose 75% of their trades and still be profitable. This is why the RRR is often more important than win rate.
Psychological Relief
A high RRR provides psychological relief because individual losses carry less weight. The trader knows that a single winner can offset multiple losers. Imagine you lose five trades in a row at $100 each. With an RRR of 1:3, two winning trades at $300 each are enough to cover all five losses and still net $100 in profit. This knowledge makes it much easier to accept individual losses.
Common RRR Mistakes
1. Unrealistic Targets
An RRR of 1:10 on paper is useless if the target is rarely reached. The RRR must be realistic — based on actual market structure, not wishful thinking.
2. Viewing RRR in Isolation
An RRR of 1:5 is worthless if the win rate is 10%. RRR and win rate must be considered together to calculate the expected value:
Expected Value = (Win Rate x Average Win) - ((1 - Win Rate) x Average Loss)
3. Calculating RRR After the Trade
Many traders compute the RRR only after the trade is closed. What matters is the planned RRR before entry — it determines whether the trade should be taken at all.
4. Moving Stops
Moving a stop changes the RRR retroactively. Widening the stop worsens the ratio and undermines the basis of the trading decision.
How to Use the RRR Properly
Minimum RRR as a Filter
Many professional traders only take setups with a minimum RRR — typically 1:2 or 1:3. Trades that do not meet this criterion are skipped.
Align RRR with Market Structure
The take-profit target should be placed at a logical market structure level — a resistance, support, or volume profile level. Arbitrary targets lead to unrealistic RRRs.
Track RRR in the Journal
In the trading journal, compare the planned and actual RRR. Patterns often emerge: are winners closed too early, systematically falling short of the planned RRR?
RRR in Practice: An Example
Imagine you spot a setup in the ES (E-Mini S&P 500) at a clear support level. Your planned entry is at 5,400, the stop loss below the swing low at 5,395 (5 points of risk), and the target at the next resistance at 5,415 (15 points of reward).
That gives you an RRR of 1:3. With one contract, you risk $250 and stand to gain $750. Even if you only win one out of every three such trades, you stay profitable.
Compare that to a trader with no plan who sets a 10-point stop because it "feels safe" but targets only 5 points (an RRR of 2:1 against them). That trader needs a win rate above 66% just to break even.
Frequently Asked Questions
What Is the Ideal RRR?
There is no universally "ideal" RRR. It depends on the strategy and win rate. Most professional traders aim for an RRR of at least 1:2. Scalpers often work with 1:1 at a high win rate; swing traders use 1:3 or higher.
Should I Take Trades with an RRR Below 1:1?
In most cases, no. An RRR below 1:1 means the potential loss exceeds the potential gain. To be profitable, you would need an extremely high win rate — which is difficult to sustain over time.
How Does Slippage Affect the RRR?
Slippage worsens the effective RRR because the actual entry or exit price deviates from the planned price. Especially with tight stops and in less liquid markets, slippage can significantly impact the RRR. Traders should account for this during planning.
How Do I Calculate My Strategy's Expected Value?
The expected value combines RRR and win rate into a single number. The formula is: (Win Rate x Average Win) - ((1 - Win Rate) x Average Loss). A positive expected value means the strategy is profitable over time. Example: With an RRR of 1:2 and a 45% win rate, you get: (0.45 x 2) - (0.55 x 1) = 0.35. For every dollar risked, you earn an average of 35 cents.