Risk/Reward Ratio Explained

Every trade has two numbers worth knowing before you enter: how much you are prepared to lose, and how much you aim to make. Their relationship — the risk/reward ratio — sets how often you must be right just to break even. Here is the maths, and how to place stops and targets from the chart.

What the risk/reward ratio measures

The risk/reward ratio (R:R) compares the distance from your entry to your stop loss with the distance from your entry to your target. For a long position, risk is entry minus stop, and reward is target minus entry.

Risk 30 pips to make 60 and the ratio is 60:30, written 1:2 — one unit of risk for two of reward. Risk first, reward second: a trade risking 60 pips to make 30 is 1:0.5, which is much harder to make pay.

The ratio says nothing about probability. It describes the shape of a trade, not whether it will work.

Ratios are quoted in pips, but what you gain or lose is money, and that depends on position size. The risk/reward calculator converts both sides into your account currency from your entry, stop and target.

The breakeven win rate

A ratio is only half the picture; the other half is how often the trade wins. To break even, the average win must pay for the average loss:

win rate × reward = (1 − win rate) × risk

Solving for the win rate gives the number that matters most:

Breakeven win rate = 1 / (1 + R), where R is reward ÷ risk.

Risk : reward	R	Breakeven win rate
1:1	1.0	50.0%
1:1.5	1.5	40.0%
1:2	2.0	33.3%
1:3	3.0	25.0%

Read the table as a floor, not a goal. At 1:2, any win rate above 33.3% puts you ahead over many trades; anything below it loses, however good the individual setups looked.

Costs push the floor higher

The formula assumes you lose exactly your stop distance and gain exactly your target. In practice you also pay the spread and any commission, and your fill can land slightly past the stop — so the real breakeven win rate sits a little above the table, most noticeably at 1:1.

Why a higher R:R is not automatically better

Many traders hear "aim for at least 1:3" and push their targets further out. Each step up in R does lower the win rate you need — but it also lowers the win rate you can realistically achieve. A target twice as far away is not hit twice as often; it is hit less often.

Two traps are common. Shrinking the stop to flatter the ratio moves it inside the market's normal noise, where ordinary movement closes the trade. And the ratio is not a promise: targets are not guaranteed to fill, and slippage can turn a 1:3 into something smaller by the time you are out.

So the useful question is not "what ratio can I claim?" but "what win rate does this setup produce, and is it above the breakeven line?" In units of risk:

Expectancy = (win rate × R) − (1 − win rate)

A 1:1 system winning 60% of the time returns +0.20 per trade; a 1:3 system winning only 20% returns −0.20. The higher ratio lost.

Worked example: EUR/USD on a $10,000 account

Suppose you trade $10,000 and risk 1% per trade — $100.

EUR/USD has been ranging and the latest swing low sits at 1.0820. Your entry is 1.0850, so the stop goes just below that swing: 30 pips of risk. The next resistance is 1.0910, so the target goes there — 60 pips of reward. The ratio is 1:2.

Size from the risk, not from a lot size you happen to like:

• Risk in money: $100
• Stop distance: 30 pips
• Risk per pip: $100 ÷ 30 = $3.33
• A standard lot on EUR/USD is $10 per pip, so the position is $3.33 ÷ $10 = 0.33 lots (about 33,000 units)

Reward at the target: 60 pips × $3.33 = $200, twice the risk.

At 1:2 the breakeven win rate is 33.3%. Winning 40% of the time gives expectancy of (0.40 × $200) − (0.60 × $100) = +$20 per trade. Winning 30% gives −$10 — the ratio did not rescue it.

The position size calculator turns any stop distance into a lot size for your balance.

Worked example: gold on a $1,000 account

Now a smaller account: $1,000, risking 2% — $20 per trade.

Gold (XAU/USD) is quoted in dollars per ounce and one standard lot is 100 ounces, so a $1.00 move is worth $100 per lot — at 0.01 per pip, $1 per pip per lot.

Price is at 2,650.00 and support sits at 2,645.00, so the stop goes below it: $5.00, or 500 pips. For 1:3 the target is $15.00 away at 2,665.00 (1,500 pips).

• Risk in money: $20
• Stop distance: 500 pips
• Risk per pip: $20 ÷ 500 = $0.04
• Pip value is $1 per pip per lot, so the position is 0.04 lots (4 ounces)

Reward at the target: 1,500 pips × $0.04 = $60, three times the risk.

Breakeven at 1:3 is 25%. A 30% win rate gives (0.30 × $60) − (0.70 × $20) = +$4 per trade. The edge is thin, which is normal at this size: the ratio gives the trade room, the win rate does the earning.

A note on yen pairs

USD/JPY works the same way, except the pip value is not fixed in dollars: one standard lot is 1,000 yen per pip, about $6.78 at a rate of 147.50. Since that is less than the $10 a EUR/USD lot pays per pip, the position for a $20 risk and a 30-pip stop grows to roughly 0.10 lots — against about 0.07 lots on EUR/USD. Convert to your account currency first — the pip value calculator does it.

Setting stop and target from market structure

Both examples chose the stop and target from chart levels, then read the ratio off them. That order matters: picking 1:3 first and hunting for a stop that makes the maths work is how stops end up in the wrong place.

1. Find the stop first — beyond the swing low or high that would prove the idea wrong, with a small buffer for spread and noise.
2. Measure the risk in pips from entry to that stop.
3. Find the target at the next real level — a prior high or low, a range boundary, a round number — and measure the reward.
4. Check the ratio. Below roughly 1:1.5 the trade may not be worth taking; above it, let the level decide.
5. Size the position so the stop costs the amount you decided to risk.

A ratio produced this way is honest, because it comes from where price actually turned.

Key takeaways

• The risk/reward ratio compares the distance to your stop with the distance to your target, written risk first — 1:2 means risking one to make two.
• Breakeven win rate is 1 / (1 + R): 50% at 1:1, 40% at 1:1.5, 33.3% at 1:2, 25% at 1:3.
• A higher ratio lowers the win rate you need — and the win rate you can realistically get. Expectancy, (win rate × R) − (1 − win rate), decides whether a system makes money.
• Spread and commission push the real breakeven win rate above the formula.
• Place the stop where the idea is invalidated and the target at a real level, then read the ratio off those distances. Position size follows from the stop and the money you will risk.

YenPip calculators are estimation tools, not financial advice. Trading carries the risk of loss, and actual results vary with broker conditions such as spread, commission and swap.