Strategy

Risk/Reward Ratio Explained

The key metric that separates profitable traders from the rest

The Risk/Reward Ratio (R/R) compares how much you're risking on a trade versus how much you could potentially gain. It's one of the most powerful concepts in trading, yet many traders ignore it.

The R/R Formula

R/R Ratio = (Target Price - Entry) / (Entry - Stop Loss)

Example: 1:3 means you risk $1 to potentially gain $3

Why R/R Matters More Than Win Rate

Here's a comparison of two traders:

Trader A: 60% Win Rate

  • R/R: 1:1
  • 100 trades × $100 risk
  • Wins: 60 × $100 = $6,000
  • Losses: 40 × $100 = $4,000
  • Net: +$2,000

Trader B: 40% Win Rate

  • R/R: 1:3
  • 100 trades × $100 risk
  • Wins: 40 × $300 = $12,000
  • Losses: 60 × $100 = $6,000
  • Net: +$6,000

Key Insight: Trader B makes 3x more money despite losing more often. This is the power of favorable risk/reward ratios.

Minimum R/R Recommendations

Trading StyleMinimum R/R
Scalping1:1.5
Day Trading1:2
Swing Trading1:3
Position Trading1:4+

Visualizing R/R in Our Calculator

Our calculator shows R/R ratio with a color-coded bar:

  • Red (1:0.5 - 1:1): Poor - avoid these trades
  • Yellow (1:1 - 1:2): Fair - acceptable for scalping
  • Green (1:2 - 1:3): Good - recommended minimum
  • Blue (1:3+): Excellent - ideal setup
Calculate Your R/R Ratio →