Risk Reward Ratio Explained: How to Plan Profitable Trades

You can lose more trades than you win and still make money. You can also win most of your trades and lose money. The difference is the risk to reward ratio: how much you stand to gain compared with how much you risk on each trade.

The basic calculation

• Risk = the distance from your entry to your stop loss.
• Reward = the distance from your entry to your take profit.
• Ratio = reward ÷ risk.

Example: you buy gold at 2,650 with a stop at 2,640 and a target at 2,680. Risk is 10, reward is 30, so the ratio is 1:3.

Thinking in R

Professional traders measure trades in R, where 1R is the amount risked. A trade that hits a 1:3 target makes +3R. A stop loss is −1R. This makes results comparable no matter the market or position size.

Why the ratio and win rate belong together

The ratio alone means nothing without your win rate. The break-even win rate for any ratio is:

Break-even win rate = 1 ÷ (1 + ratio)

With a 1:2 ratio you only need to win a third of your trades to break even. Anything above that is profit, before costs.

Expectancy: the number that really matters

Expectancy = (win rate × average win) − (loss rate × average loss)

Example: you win 45% of trades at +2R and lose 55% at −1R. Expectancy = 0.45 × 2 − 0.55 × 1 = +0.35R per trade. Over 100 trades, that is +35R. If you risk 1% per trade, that is roughly +35% before costs.

How to set realistic targets

A great ratio on paper is useless if the target is unrealistic. Place targets at real levels:

• The next support or resistance zone.
• A previous swing high or low.
• A Fibonacci extension, such as 1.272 or 1.618.
• A measured move from a chart pattern.

If the nearest realistic target gives less than about 1.5R, the trade is usually not worth taking.

Managing the trade in stages

Many traders split the position:

1. Take half the position off at 2R.
2. Move the stop to break-even.
3. Let the rest run to 3R or trail it behind swing points.

This locks in profit while still giving the trade room to deliver a big winner.

Common mistakes

• Moving the stop further away when price approaches it. That changes your ratio after the fact.
• Closing winners too early out of fear, which turns a 1:3 plan into a 1:0.8 result.
• Forgetting costs. Spreads and fees reduce your real reward, especially on short timeframes.

Plan trades with Alice

Alice's Best Trades show entry, stop loss and two targets for every setup, and the risk calculator pro turns your stop distance into position size, margin and liquidation price. The trading journal records the R of every trade so you can measure your real expectancy.

Frequently asked questions

This guide is for education only and is not financial advice. Trading involves a high risk of loss. Test any method on a demo account first and never risk money you cannot afford to lose.