Lesson 20 of 47
Risk-to-reward ratio
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Risk-to-reward (RRR) compares what you stand to lose with what you stand to gain. Risk 30 pips to make 60 and you have a 1:2 trade. Traders shorten this to 'R': your initial risk is 1R, so that target is 2R.
Win rate is meaningless on its own
A 40% win rate sounds terrible until you pair it with reward. Expectancy = (win rate × average win) − (loss rate × average loss). What matters is the combination, never either number alone.
| RRR | Breakeven win rate | Result at 50% wins |
|---|---|---|
| 1:1 | 50% | Flat before costs |
| 1:1.5 | 40% | +0.25R per trade |
| 1:2 | 33% | +0.5R per trade |
| 1:3 | 25% | +1R per trade |
Do the sum before you click
100 trades at 1:2 with only a 40% win rate returns +20R. 100 trades at 1:1 with a 55% win rate returns +10R. The trader who is 'wrong' more often makes twice as much.
Using RRR honestly
- Measure it from your real entry to a target the market can plausibly reach — not to a number that makes the ratio look good.
- If the sensible target gives less than 1:1.5, the setup is a pass. There will be another one.
- Never widen the stop to improve the ratio; that is the same as taking a bigger loss.
- Log the planned R and the realised R for every trade — the gap between them is your management skill.
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