Risk-reward ratio (R:R) is the comparison between how much you stand to lose (risk) and how much you stand to gain (reward) on a single trade. A 1:2 R:R means you’re risking 1 unit to potentially gain 2 units. It is one of the most important concepts in trading because it determines the win rate you need to be profitable.
How Risk-Reward Ratio Works
Risk-Reward Ratio = Potential Reward / Potential Risk
Or in pip terms:
R:R = (Take Profit - Entry) / (Entry - Stop Loss)
Example
- Entry: 1.0850
- Stop loss: 1.0820 (30 pips risk)
- Take profit: 1.0910 (60 pips reward)
- R:R = 60 / 30 = 1:2
This means for every dollar you risk, you stand to gain two dollars.
R:R and Required Win Rate
The power of risk-reward ratio is its relationship to required win rate. Higher R:R ratios allow you to be profitable with lower win rates.
| R:R | Required Win Rate (Break Even) | Required Win Rate (Profitable) |
|---|---|---|
| 1:1 | 50.0% | 52%+ |
| 1:1.5 | 40.0% | 42%+ |
| 1:2 | 33.3% | 35%+ |
| 1:3 | 25.0% | 27%+ |
| 1:4 | 20.0% | 22%+ |
A trader with a 1:3 R:R only needs to win 1 out of every 4 trades to break even. This is why R:R is more important than win rate alone.
Measuring R in Trading
Professional traders express profits and losses in terms of R multiples rather than pips or dollars:
- +1R = Target hit (full reward captured)
- +2R = Twice the planned reward
- -1R = Stop loss hit (full risk realized)
- -0.5R = Exited early at half the planned risk
This standardized measurement allows you to compare performance across different trades, pairs, and position sizes. A “+2R trade on EUR/USD” and a “+2R trade on GBP/JPY” are directly comparable, even if the pip distances and dollar amounts were different.
Common R:R Mistakes
1. Ignoring R:R entirely
Some traders focus only on win rate. A 70% win rate means nothing if your average loss is 3x your average win — you’re losing money despite winning most trades.
2. Unrealistic R:R targets
Setting a 1:5 R:R sounds great on paper, but if the market structure doesn’t support that target, you’ll rarely hit your take profit. Your R:R must be realistic given the pair’s volatility and the setup’s potential.
3. Inconsistent R:R tracking
Your planned R:R and actual R:R are often different. Exiting early, moving stops, or holding past your target all change your actual R:R. Track both to identify behavioral patterns.
Tracking R:R in Your Journal
A trading journal should track:
- Planned R:R — The ratio at trade entry
- Actual R:R — The ratio at trade exit (planned vs. actual reveals behavioral patterns)
- Average R:R — Your mean risk-reward across all trades
- R:R by setup type — Which setups deliver the best actual R:R?
- R-multiple distribution — How your outcomes spread across -1R, +1R, +2R, etc.
PipJournal tracks your planned and actual R:R on every trade, calculates your average R-multiple, and alerts you when you’re consistently exiting before your target.
