Risk-Reward Ratio Guide: Calculate Your Trade Profitability

Understanding Risk-Reward Ratios

Risk-reward ratio (RR) compares how much you risk versus how much you stand to gain on a trade. This single metric determines whether your trading strategy is mathematically profitable, regardless of your win rate. A 1:3 risk-reward ratio can be profitable with just 30% win rate!

The Risk-Reward Formula

Risk-Reward Ratio = Potential Profit ÷ Potential Loss

Example:

Entry: EUR/USD at 1.2500
Stop Loss: 1.2450 (50 pips) = Risk $500
Take Profit: 1.2650 (150 pips) = Profit $1,500
Risk-Reward: $1,500 ÷ $500 = 1:3 RR

Ideal Risk-Reward Ratios

1:1 - Break-even risk/reward. Only trade if win rate exceeds 70%+
1:1.5 - Tight RR. Requires 60%+ win rate for profitability
1:2 - Good RR. Profitable with 50%+ win rate
1:3 - Excellent RR. Profitable with 40%+ win rate
1:4+ - Outstanding RR. Profitable with 25%+ win rate

Why Risk-Reward Matters More Than Win Rate

Consider two traders:

Trader A: 70% win rate with 1:1 RR

10 trades: 7 winners at +$500, 3 losers at -$500
Profit: (7 × $500) - (3 × $500) = $2,000 profit

Trader B: 40% win rate with 1:3 RR

10 trades: 4 winners at +$1,500, 6 losers at -$500
Profit: (4 × $1,500) - (6 × $500) = $3,000 profit

Trader B with lower win rate earns MORE profit due to superior risk-reward!

Calculating Required Win Rate for Profitability

Breakeven Win Rate % = 100 ÷ (Risk-Reward + 1)

Examples:

1:1 RR: Breakeven = 100 ÷ 2 = 50% win rate needed
1:2 RR: Breakeven = 100 ÷ 3 = 33% win rate needed
1:3 RR: Breakeven = 100 ÷ 4 = 25% win rate needed
1:5 RR: Breakeven = 100 ÷ 6 = 17% win rate needed

Real-World RR Calculation

You're analyzing a GBP/USD trade setup:

Current price: 1.2700
Ideal entry: 1.2680 (order block)
Stop loss placement: 1.2630 (below order block)
Risk: 50 pips = $500 (with 0.5 lots)
First target: 1.2750 = 70 pips profit = $700 profit
Second target: 1.2800 = 120 pips profit = $1,200 profit
Risk-Reward: $1,200 ÷ $500 = 1:2.4 RR

Scaling Out for Better RR Management

Many traders use multiple take-profit levels to maximize RR:

Sell 25% at 1:1 RR to lock in profit
Sell 25% at 1:2 RR to secure profit
Sell 25% at 1:3 RR for good gains
Let 25% ride to 1:4+ for homerun trades

This approach guarantees minimum 1:1.75 RR while allowing for higher targets.

FAQ

Q: Is 1:2 RR the minimum I should accept?

A: Generally yes. 1:2 RR is considered the professional minimum. Avoid trading 1:1 or worse ratios unless your win rate is 70%+.

Q: Can I adjust my stop loss to improve RR?

A: Only if your new stop loss still makes logical sense for the setup. Never place stops closer just to improve RR numbers.

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