Risk Reward Ratio Trading: How to Calculate and Use It
The risk reward ratio compares what you stand to lose on a trade with what you aim to gain. You measure it from three prices you set before entering: your entry, your stop-loss and your profit target. Risk $100 to make $300 and your ratio is 1:3. The ratio alone does not make a trade good. It only becomes useful when you pair it with a realistic win rate and a fixed amount risked per trade. This guide shows how to do all three, with worked numbers you can copy into your own plan.
Key Takeaways
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Risk is the distance from entry to stop. Reward is the distance from entry to target. Divide reward by risk to get your reward-to-risk number.
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Every ratio has a break-even win rate. At 1:2 you need to win about 33.3% of trades before costs. At 1:1 you need 50%.
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Size each position from your stop distance and a fixed percentage of your account, so the stop-loss, not a hunch, decides what a loss costs.
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A planned ratio is not a realized ratio. Early exits, spreads and slippage shrink it, so track your actual averages.
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If you trade under account rules such as a daily loss limit, risk per trade is what keeps one bad session from ending your run.
Table of Contents
What the risk reward ratio actually measures
The risk/reward ratio sets the potential loss on a trade against its anticipated profit, which is how Investopedia defines it. It turns a vague feeling (“this looks good”) into a number you can compare across trades.
There are two ways to write it, and mixing them up causes most of the confusion you will see online:
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Risk:reward, written 1:3, means one unit risked for three units of potential gain.
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Reward:risk, written 3:1 or just “3R”, flips the order. The trade is the same.
Pick one convention and keep it in your journal. In this article we write risk first (1:3) and say “3R” when we talk about the reward in multiples of the amount risked.
A “good” ratio does not exist in isolation. People often ask whether 1:2 is good, whether 1:0.5 is acceptable or whether a ratio of 1.67 is fine. The honest answer is that each depends on how often your setup wins. A 1:0.5 ratio risks two units to make one, so you would need to win roughly two out of every three trades just to break even. A 1:2 ratio needs far less. We cover the exact numbers below.
How to calculate the risk reward ratio
The calculation takes four steps, and you do it before you click buy or sell.
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Write down your planned entry price.
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Place your stop-loss at the price that tells you the idea is wrong.
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Place your profit target at a level the chart supports, independent of the stop.
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Subtract to get both distances in the same units (price, pips or points), then divide reward by risk.
For a long trade, risk is entry minus stop and reward is target minus entry. For a short trade, reverse the subtraction so both numbers stay positive.
A worked example with a stock or crypto price
Say you plan to buy at $100 with a stop at $95 and a target at $115.
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Risk: $100 − $95 = $5
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Reward: $115 − $100 = $15
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Ratio: $15 ÷ $5 = 3, so the trade is 1:3 (3R)
If you buy 20 shares, you risk $100 to make $300.
A worked example in forex
Take a long EUR/USD trade entered at 1.1000, with a stop at 1.0950 and a target at 1.1100. The stop is 50 pips away and the target 100 pips away, which gives a 1:2 ratio, and the break-even win rate for that setup is 33.3%.
A short trade
You short at 50.00 with a stop at 51.00 and a target at 47.00. Risk is 1.00, reward is 3.00, so the ratio is 1:3. The direction flipped, but the logic did not.
One point trips up many beginners: leverage does not improve this ratio. It changes your margin and how close liquidation sits, but the distances to stop and target stay the same.
Why the ratio only makes sense next to your win rate
A high reward-to-risk ratio sounds like an edge, but it is half of an equation. The other half is how often the trade works.
Without costs, the break-even win rate is 1 ÷ (1 + reward-to-risk). The same threshold can also be written as risk ÷ (risk + reward), as the InvestingGoal calculator explains. Here is the table that falls out of the formula:
| Risk:reward | Reward-to-risk | Break-even win rate (no costs) |
|---|---|---|
| 1:0.5 | 0.5R | 66.7% |
| 1:1 | 1R | 50% |
| 1:1.5 | 1.5R | 40% |
| 1:2 | 2R | 33.3% |
| 1:3 | 3R | 25% |
| 1:5 | 5R | 16.7% |
Read the table as a floor, not a target. Winning exactly 33.3% at 1:2 earns you nothing before costs. Real profit comes from beating the line.
Expectancy: what a typical trade is worth
Expectancy puts both halves into one number: (win rate × average win) − (loss rate × average loss), measured in R.
Suppose your setup wins 40% of the time at 1:2.
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0.40 × 2R = +0.80R
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0.60 × 1R = −0.60R
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Expectancy = +0.20R per trade
Risking $100 per trade, that is an average of $20 per trade over a large sample. Now suppose the same setup wins only 30%. Expectancy becomes (0.30 × 2) − (0.70 × 1) = −0.10R. Same ratio, losing strategy. This is why chasing bigger targets without checking how often they get hit tends to backfire: a farther target usually gets hit less often.
Planned versus realized ratios
The 1:3 you draw on a chart is a plan. If you routinely move your stop, cut winners early or take partial profits, your realized average win may be far lower than the target. LuxAlgo’s analysis makes the same distinction: a strategy can aim for 3R and still average only 1.5R on winners after early exits.
The fix is simple and unglamorous. Log every trade with its planned and actual result in R, then calculate your real averages every month or every 50 trades.
Costs shrink your ratio
Spreads, commissions and slippage widen your effective risk and trim your effective reward at the same time. On a tight 1:1 or 1:1.5 setup the damage is proportionally larger, because the costs are a bigger slice of a small target. A scalper working for a few ticks feels this far more than a swing trader aiming for hundreds of pips. If you trade short holding periods, our guide to tick scalping and what it costs walks through that math.
A practical habit: when you plan a trade, add the expected spread to your risk distance and subtract it from your reward distance, then recompute the ratio. If the trade only works on the gross number, skip it.
How much to risk per trade
The ratio tells you the shape of a trade. Your risk per trade sets its size. Most guidance converges on a small fixed percentage of your account.
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CME Group’s 2% Rule says to never put more than 2% of account equity at risk on a single trade. On a $50,000 account that is $1,000.
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CME Group’s page on proper position size says new traders are best off risking 1% to 3% of the account on one trade.
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A common 1% rule interpretation caps the loss on any trade at 1% of the total account, for example $100 on a $10,000 account.
The percentage you pick should match your experience and your drawdown tolerance. A smaller figure leaves room for the losing streaks every strategy produces.
Stop first, size second
Never choose a position size and then drop a stop wherever it fits. Do it in this order:
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Decide your risk amount: account × risk percentage.
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Place the stop at a logical level, one that shows you are wrong about direction, and not at a spot normal market movement can easily trigger. CME Group’s guidance makes this point directly.
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Divide the risk amount by the stop distance (times the value per pip or per point).
Position size in forex: a worked example
Account: $10,000. Risk: 1%, so $100. Stop: 50 pips. Standard-lot pip value on a USD-quoted pair: $10 per pip.
Lot size = $100 ÷ (50 pips × $10) = 0.2 lots.
If the stop is hit, you lose about $100, which is 1% of the account. If the trade reaches a 1:3 target at 150 pips, you make about $300.
Widen the stop to 100 pips and the math says to cut size to 0.1 lots. The dollar risk stays at $100. That is the whole point: your stop distance changes the size, never the amount you are willing to lose.
Position size in stocks
Account: $25,000. Risk: 1%, so $250. Entry $40, stop $38, so $2 of risk per share.
Shares = $250 ÷ $2 = 125 shares. That is a $5,000 position, but the loss at your stop is only $250.
Watch your total exposure
Risking 1% per trade is not the same as risking 1% of the account. With five open positions that all move together, a single market shock can hit all five stops. Count your open risk across correlated trades, such as several long dollar trades or several tech stocks, and cap the combined figure.
Using the ratio when your account has loss limits
If you trade a funded simulated account, your risk per trade also has to fit inside the account’s rules. Take our own rules as an example. A PropFunding account has a 5% daily loss limit and a 20% static max loss, and it has no consistency rules or minimum trading days. You can read the exact definitions in our profit targets and loss limits documentation.
Here is how that interacts with the ratio on a 10,000 account:
| Risk per trade | Dollar risk | Losses in a row to reach a 5% daily limit |
|---|---|---|
| 0.5% | $50 | 10 |
| 1% | $100 | 5 |
| 2% | $200 | 2.5 (three losses) |
| 5% | $500 | 1 |
These numbers show why risk per trade matters more than any single ratio. At 1% risk, one rough morning of five straight stops uses your whole daily allowance. At 0.5% you have room to be wrong several more times and still trade the afternoon.
Because there are no consistency rules, you are free to choose a ratio that fits your strategy, whether that is 1:1.5 with a high win rate or 1:3 with a lower one. The rules do not force a particular style on you. Your own plan, your expectancy and your risk per trade do that work.
Choosing a ratio that fits your strategy
There is no universal best ratio, but you can match the ratio to the style:
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Scalping and short-term trading: targets are small, so ratios around 1:1 to 1:1.5 are common, and costs matter most. You need a higher win rate, so check your break-even line after spread.
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Day trading and intraday swings: 1:2 is a common starting point, which needs about one win in three before costs.
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Swing and position trading: wider stops allow 1:3 or more, but fewer trades hit the distant target, so verify your hit rate on your own history.
To pick yours, work backward. Look at your last 50 or 100 trades, compute your actual win rate, then use the table above to see which ratio gives you a margin above break-even. If your win rate is 45% and you average 1.3R on winners, your expectancy is (0.45 × 1.3) − (0.55 × 1) = +0.035R. That is positive but thin, and costs could erase it. Improving the average winner to 1.6R lifts expectancy to +0.17R. That kind of small adjustment is where the ratio earns its keep.
Common mistakes with risk reward
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Setting the target to fit the ratio. Choosing a 1:3 target because it sounds good, when the chart shows resistance at 1:1.5, produces trades that rarely get there.
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Moving the stop after entry. Widening a stop turns your 1:3 into a 1:1.5 without telling you.
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Ignoring win rate. A 1:5 ratio with a 10% win rate loses money. Check the table.
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Using a different risk amount each trade. Variable sizing makes R-multiples meaningless. Fix the percentage, then size to the stop.
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Treating the ratio as a signal. It says nothing about whether the entry is any good. It only prices the bet.
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Skipping the journal. Without recorded results you are guessing at both your win rate and your realized ratio. Our breakdown of prop firm stats shows why disciplined, measured trading matters when the goal is staying inside account limits.
A simple pre-trade checklist
Before every order, run through this in under a minute:
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Entry, stop and target written down, in price.
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Ratio calculated after estimated spread and fees.
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Break-even win rate for that ratio compared with your recorded win rate.
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Risk amount fixed at your chosen percentage of the account.
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Position size calculated from the stop distance.
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Total open risk across all positions within your cap.
If any line fails, the trade waits.
Practice the process on a funded simulated account
Numbers on a page are easier than numbers on a live chart with a daily limit running. At PropFunding, we offer instant funded simulated MT5 accounts with free entry to qualify, so you can put your ratio, win rate and position sizing to work without an upfront fee. You get free entry for the first two attempts. After you qualify, there is a one-time activation fee of 249 USD to unlock standard funded account features and withdrawals. Profit is redeemed in USDC at a fixed rate.
If you want to see how the rules fit your plan, check the account sizes and fees, then start from our free-entry instant funding page. Use the sizing math above and keep each trade small enough that a bad day stays survivable.
FAQ
What is a good risk reward ratio for trading?
It depends on your win rate. A ratio of 1:2 breaks even at a 33.3% win rate before costs, and 1:3 breaks even at 25%. Many traders aim for at least 1:2, but only your own trade history shows whether your setups actually deliver it.
How do I calculate the risk reward ratio?
Subtract your stop-loss from your entry to get risk, subtract your entry from your target to get reward (reverse both for shorts), then divide reward by risk. Entry $100, stop $95 and target $115 gives $15 ÷ $5, which is 1:3.
How much should I risk per trade?
Many educators suggest 1% to 2% of your account. CME Group’s material suggests no more than 2% on one trade and 1% to 3% for newer traders. If you trade under a daily loss limit, a lower figure gives you more room.
Is a risk reward ratio of 1:1 good?
It can be, if you win more than half your trades after costs. At exactly 50% you only break even before costs, and spreads or fees push you below that. Traders using 1:1 usually need a strategy with a high, well-documented hit rate.
Does leverage change my risk reward ratio?
No. Leverage changes your margin requirement and how close liquidation sits, but the distances from entry to stop and from entry to target stay the same. The ratio is set by your prices, and your loss is set by position size and stop distance.