Risk-Reward Ratio and Break-Even Win Rate Explained
The risk-reward ratio compares the distance to the target with the distance to the stop. A ratio of 2 means the target is twice as far as the stop. On its own it says nothing about profitability: it only tells you which win rate you need to break even.
Beginner · 9 min read · Updated
What you will learn
Calculate the win rate a risk-reward ratio requires and the expectancy of a method, costs included.
Read first: Risk per Trade: How Much Should You Risk on One Trade?
The break-even win rate
If every winning trade earns R times the risk and every losing trade loses 1 time the risk, the method breaks even when the win rate equals 1 ÷ (1 + R).
| Risk-reward (R) | Break-even win rate |
|---|---|
| 0.5 | 66.7% |
| 1 | 50.0% |
| 1.5 | 40.0% |
| 2 | 33.3% |
| 3 | 25.0% |
A high ratio lowers the win rate you need, but targets that are far away are reached less often. The two numbers always move together; neither one is good or bad by itself.
Expectancy: the number that matters
Expectancy combines both: expectancy = win rate × average win − loss rate × average loss. Expressed in R (multiples of the risk), it tells you what a trade earns on average.
Hypothetical example · Two methods
Method A wins 40% of the time with an average win of 2R: 0.4 × 2 − 0.6 × 1 = +0.2R per trade. Method B wins 60% of the time with an average win of 0.6R: 0.6 × 0.6 − 0.4 × 1 = −0.04R per trade. B wins more often and still loses money.
Costs change the ratio
Commissions and slippage are paid on every trade, winners and losers. If they cost 0.1R per trade, a planned 2R winner becomes 1.9R and a 1R loser becomes 1.1R. Method A above drops from +0.2R to 0.4 × 1.9 − 0.6 × 1.1 = +0.1R: half of its edge disappears. Short-term methods with small targets are the most exposed; the lesson on slippage shows how to measure it.
Planned ratio versus realised ratio
- The planned ratio is what you draw before entering.
- The realised ratio is what your journal shows after exits, partial profits and moved stops.
- Many traders plan 2R and realise 1.2R because they exit early. Compare both every week in your trading journal.
From R to money: a worked month
Hypothetical example · 40 trades at $100 of risk
The method wins 40% of the time, with an average win of 2R and an average loss of 1R. Over 40 trades: 16 winners × $200 = $3,200 and 24 losers × $100 = $2,400, a gross result of +$800, which is +0.2R × 40 trades × $100. With $10 of costs per trade, the net result is $800 − $400 = +$400.
The same expectancy can arrive in very different orders. Ten losses can come first and wins later, which is why the lessons on risk per trade and drawdown matter even for a method with a positive expectancy. Judge expectancy over a large sample, not over a week.
Common mistakes
- Choosing a far target only to “improve” the ratio, without evidence that price gets there.
- Judging a method by its win rate alone.
- Forgetting costs in the expectancy.
- Measuring expectancy on fewer than a few dozen trades.
Practice exercise
Take the last 30 trades of your journal or of a backtest. Calculate the win rate, the average win and the average loss in R, then the expectancy before and after subtracting your average costs per trade. Is the method still positive after costs?
Check your understanding
1. What win rate does a risk-reward ratio of 3 need to break even?
- 33.3%
- 25%
- 75%
Show the answer
Answer: 25%. 1 ÷ (1 + 3) = 0.25.
2. A method wins 50% with an average win of 1.5R. What is its expectancy?
- +0.25R
- +0.5R
- +1.5R
Show the answer
Answer: +0.25R. 0.5 × 1.5 − 0.5 × 1 = 0.25R.
3. Why do costs hurt short-term methods most?
- They pay higher commissions per contract
- Costs are a larger share of small targets and stops
- They cannot use limit orders
Show the answer
Answer: Costs are a larger share of small targets and stops. The same cost in ticks is a bigger fraction of a small R.
Practise with the free tools
Frequently asked questions
What is a good risk-reward ratio?
There is none in general. A ratio is good only if your measured win rate at that ratio gives a positive expectancy after costs.
Is a 1:2 risk-reward the same as R = 2?
Yes. Both mean the potential gain is twice the risk.
Should I move my target to keep a 2R ratio?
Only if the market structure justifies it. A target should be a level price is likely to reach, such as the next liquidity, not a fixed multiple.
Related lessons
References and further reading
- Day Trading: Your Dollars at Risk — U.S. Securities and Exchange Commission
- Basics of Futures Trading — U.S. Commodity Futures Trading Commission
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