What Is Risk Reward Ratio in Trading?

If there's one number that separates profitable traders from everyone else, it's their risk reward ratio. Not their win rate. Not how many indicators they use. Not how many hours they spend staring at charts.

Risk reward ratio is the foundation that every other part of your trading strategy is built on. Get it right and you can be profitable even with a modest win rate. Ignore it and no amount of technical analysis will save you.

How to Calculate Risk Reward Ratio

The formula is simple:

Risk Reward Ratio = (Target - Entry) / (Entry - Stop Loss)

That gives you the reward side relative to the risk side. A result of 3 means you stand to gain 3 units for every 1 unit you risk - written as 3:1 R:R.

Long Trade Example

• Entry: $100
• Stop loss: $98 (risking $2)
• Take profit: $106 (targeting $6)
• R:R = $6 / $2 = 3:1

Short Trade Example

• Entry: $50
• Stop loss: $51.50 (risking $1.50)
• Take profit: $46.50 (targeting $3.50)
• R:R = $3.50 / $1.50 = 2.33:1

You should calculate this before every trade, not after. If the R:R doesn't meet your minimum threshold, skip the trade. Our free risk reward calculator does this math instantly - plug in your entry, stop, and target to see the ratio before you commit.

Why R:R Matters More Than Win Rate

Most beginners obsess over win rate. They want to be right on 80% of their trades. But a high win rate means nothing if your losers are bigger than your winners.

Here's how different combinations of R:R and win rate play out over 100 trades, risking $100 per trade:

Win Rate	R:R	Wins	Losses	Profit from Wins	Loss from Losses	Net P&L
80%	0.5:1	80	20	$4,000	-$2,000	+$2,000
80%	0.3:1	80	20	$2,400	-$2,000	+$400
60%	1:1	60	40	$6,000	-$4,000	+$2,000
50%	2:1	50	50	$10,000	-$5,000	+$5,000
40%	3:1	40	60	$12,000	-$6,000	+$6,000
30%	3:1	30	70	$9,000	-$7,000	+$2,000
50%	0.5:1	50	50	$2,500	-$5,000	-$2,500

Read that table carefully. A trader winning only 40% of the time with 3:1 R:R makes more than a trader winning 80% of the time with 0.5:1 R:R. And a 50% win rate with 0.5:1 R:R is a losing strategy - you're right half the time and still bleeding money.

The lesson: R:R determines the math of your edge. Win rate is secondary.

What Is a Good Risk Reward Ratio?

There's no universal "best" ratio - it depends on your style and timeframe. But here are practical guidelines:

• Day trading: Minimum 1.5:1, ideally 2:1 or higher
• Swing trading: Minimum 2:1, ideally 3:1 or higher
• Scalping: Can work with 1:1 if win rate is high enough, but the margin for error is razor thin

As a general rule, never take a trade below 1:1. If your potential reward doesn't at least match your risk, the setup isn't worth it. Most professional traders aim for 2:1 as their baseline and look for 3:1+ setups whenever possible.

Context matters too. A 1.5:1 trade on a high-probability A+ setup might be better than forcing a 3:1 target that sits behind multiple resistance levels.

How to Improve Your Risk Reward Ratio

Your R:R isn't fixed - it's a direct result of where you enter, where you place your stop, and where you target. Improving any of those three improves your ratio.

Enter at Better Prices

The closer your entry is to your stop loss level (without getting stopped out), the tighter your risk and the better your R:R. Strategies for this:

• Wait for retests instead of chasing breakouts. Price often returns to a level before continuing.
• Use fair value gaps as entry zones. FVGs give you a precise area where price is likely to react. Learn more about what fair value gaps are and how to trade them.
• Enter at order blocks rather than in the middle of a move. Order blocks mark institutional entry points that often hold on retests.

Place Tighter Stops Using Structure

A stop loss should be placed at a level where your trade idea is invalidated - not at an arbitrary distance. Structural placement keeps stops tight and meaningful:

• Below the most recent swing low (for longs) or above the most recent swing high (for shorts)
• Below/above an order block or demand/supply zone
• Beyond a market structure break point

Target Liquidity Levels

Your take profit should aim for areas where price is likely to reach - not arbitrary round numbers. Target areas where resting liquidity sits: previous highs/lows, equal highs/lows, and untested key levels.

Common Risk Reward Mistakes

Moving Your Stop Loss Further Away

This is the most common R:R killer. You enter a trade, price moves against you, and you widen your stop to "give it more room." You've just destroyed your risk reward ratio. If your original stop was $2 and you moved it to $4, your 3:1 trade just became 1.5:1. Your entire edge may have evaporated.

Taking Profits Too Early

The opposite problem. Price moves in your favor and you panic-close at 1:1 because you're afraid of giving back profits. You planned for 3:1 but took 1:1 - now you need a much higher win rate to be profitable. Let your winners run to target.

Not Calculating R:R Before Entry

If you enter a trade without knowing your R:R, you're gambling. Calculate it before you click the button. If the ratio doesn't meet your minimum, pass on the trade.

Using Arbitrary Levels

Setting your stop at exactly 20 pips or your target at exactly 100 pips because they're round numbers is lazy. The market doesn't care about your round numbers. Use structural levels - actual support, resistance, swing points, and liquidity pools.

Risk Reward in Practice

Let's make this concrete. You have a $10,000 account and you risk 1% per trade ($100).

With a 3:1 R:R, each winner earns $300 and each loser costs $100.

Over 10 trades with a 50% win rate:

• 5 winners: 5 x $300 = $1,500
• 5 losers: 5 x $100 = -$500
• Net profit: +$1,000 (10% account growth in 10 trades)

Now imagine the same 10 trades but you only win 4 out of 10 - a 40% win rate:

• 4 winners: 4 x $300 = $1,200
• 6 losers: 6 x $100 = -$600
• Net profit: +$600 (still profitable despite losing more often than winning)

Even at 3 wins out of 10 (30% win rate), you are still profitable: $900 in wins minus $700 in losses = +$200. The actual breakeven point for a 3:1 ratio is just 25% win rate. That's the power of risk reward ratio.

To size those $100 risk trades correctly based on your stop distance, use a position size calculator so you're risking the exact dollar amount you intend to. And if you want to understand how losing streaks affect your account at different risk levels, that's worth studying too.

When you're ready to formalize this into a repeatable process, read about building a complete trading system around your R:R rules and entry criteria.

Key Takeaways

• Risk reward ratio measures how much you stand to gain versus how much you risk on a trade
• The formula is (Target - Entry) / (Entry - Stop Loss)
• R:R matters more than win rate - a 40% win rate with 3:1 R:R is more profitable than an 80% win rate with 0.5:1 R:R
• Aim for at least 1.5:1 for day trading and 2:1+ for swing trading
• Improve R:R by entering at better prices, using structural stop placement, and targeting liquidity levels
• Never move your stop loss further away to "give it room" - this destroys your edge
• Always calculate R:R before entering a trade, not after
• Use structural levels for stops and targets, not arbitrary round numbers