How the risk-reward ratio works
The risk-reward ratio measures the potential profit of a trade against its potential loss. It is the single most important number for judging whether a setup is worth taking, because it tells you how skewed the payoff is in your favor before you ever click buy.
Risk-Reward Ratio
R:R = Reward / Risk = |Target − Entry| / |Entry − Stop Loss|
Example: entry $100, stop $95, target $115 → reward $15, risk $5 → 1 : 3
Required Win Rate
Win Rate = Risk / (Risk + Reward)
Example: $5 / ($5 + $15) = 25% needed to break even
The required win rate is the minimum percentage of trades you must win to break even at a given ratio, before commissions and slippage. Because it equals risk divided by the sum of risk and reward, a wider target lowers the win rate you need. A 1:1 setup demands a 50% win rate, a 1:2 setup needs 33.3%, and a 1:3 setup needs only 25%. Pairing a favorable ratio with a realistic win rate is what produces a positive expected value over many trades.
Frequently Asked Questions
What is a risk-reward ratio?
The risk-reward ratio (R:R) compares how much you stand to lose on a trade to how much you stand to gain. It is calculated as reward divided by risk, where risk is the distance from your entry price to your stop loss and reward is the distance from your entry to your take-profit target. A 1:3 ratio means you risk $1 to make $3. A higher reward relative to risk lets you stay profitable even with a lower win rate.
What win rate do I need to break even?
Your breakeven win rate is risk / (risk + reward). For a 1:2 risk-reward setup, that is 1 / (1 + 2) = 33.3%, so you only need to win about a third of your trades to break even before fees. For a 1:1 setup you need 50%, and for a 1:3 setup just 25%. This is why traders favor setups where the reward meaningfully exceeds the risk.
What is a good risk-reward ratio?
Most professional traders look for a minimum of 1:2 (risk $1 to make $2), and many will not take a trade below that threshold. A 1:3 ratio or better is considered strong. There is no universally "best" ratio — a strategy with a high win rate can be profitable at 1:1, while a low-win-rate trend-following system needs 1:3 or higher. What matters is that your ratio and your realistic win rate combine to a positive expected value.
How is the required win rate calculated?
Required win rate = risk / (risk + reward), expressed as a percentage. Risk is the per-share distance from entry to stop loss, and reward is the per-share distance from entry to target. The calculator above computes this automatically — enter your entry, stop, and target and it shows the exact minimum win rate you need to break even before commissions and slippage.