What Is Risk/Reward Ratio?
Risk/reward ratio (R:R) compares how much you stand to gain versus how much you risk on a single trade. A 1:3 R:R means you're risking $1 to potentially make $3. A 1:1 R:R means equal risk and reward.
The ratio determines the minimum win rate needed for profitability. With 1:1 R:R, you need more than 50% wins to make money. With 1:3 R:R, you only need 25% wins — losing 75% of trades is still profitable. With 1:5 R:R, even a 17% win rate breaks even.
Most retail traders intuitively prefer high win rates over high R:R, but systematic traders consistently choose the opposite. Trend-following systems often run 30-45% win rates with 2-5R multiples — most trades lose small, occasional winners are huge. The math is the same; the psychology is different.
Related terms
- Expectancy — The average profit or loss per trade, given win rate and average win/loss size.
- Win Rate — The percentage of trades that close profitably out of total trades taken.
- Stop Loss — A predefined exit price that limits losses if a trade moves against you.