Why the risk/reward ratio matters
Risk/reward compares what you stand to lose against what you're aiming to make. Risk one dollar to make three and you have a 1:3 ratio. The reason it's so important: a better ratio dramatically lowers the win rate you need to stay profitable.
| Risk / reward | Break-even win rate |
|---|---|
| 1 : 1 | 50% |
| 1 : 2 | ~34% |
| 1 : 3 | 25% |
This is the math behind "cut your losers, let your winners run." It's also why logging your planned stop and target matters — without them, you can't tell whether you actually took good trades or just got lucky.
Ratio isn't everythingA great risk/reward on a setup you rarely win is still a losing plan. Pair this with your real win rate from your journal to know your true edge.
Next, size the trade with the position size calculator, or read Risk management 101.
Frequently asked questions
How do you calculate risk/reward ratio?
Divide your potential reward by your potential risk. Reward is the distance from entry to target, risk is the distance from entry to stop. Risking $2 per share to make $6 is a 1:3 risk/reward ratio — three units of reward for every unit of risk.
What is a good risk/reward ratio?
No ratio is good on its own, because it only matters alongside how often the trade actually reaches the target. A 1:3 setup that wins 20% of the time loses money; a 1:1 setup that wins 60% of the time does not. Read the ratio together with the break-even win rate it implies and your own historical hit rate on similar setups.
What win rate do I need to break even?
Break-even win rate is 1 ÷ (1 + R), where R is your reward-to-risk ratio. At 1:1 you need to win more than 50% of the time, at 1:2 more than 33.3%, and at 1:3 more than 25% — before commissions and slippage, which raise every one of those thresholds.
