The risk-reward ratio compares the distance from your entry to your profit target against the distance from your entry to your stop-loss. A ratio of 2:1 means you're aiming to make twice what you're risking. A favourable ratio means a trading strategy can still be profitable even with a win rate below 50%, since winners are sized larger than losers.
The formula
Target Price − Entry PriceEntry Price − Stop-Loss Price
= Risk-Reward Ratio
Why it matters
- —A 2:1 (or better) risk-reward ratio means a strategy can be profitable even at a 40% win rate — the math of asymmetric outcomes matters more than being right most of the time.
- —Forces discipline before entering a trade: if the reward doesn't justify the risk at current prices, the trade isn't worth taking regardless of how confident the setup looks.
- —Should be calculated using a realistic stop and target tied to actual technical levels — not arbitrary percentages that ignore the chart.
How to read it
| < 1:1 | Risking more than the potential reward — generally unfavourable |
| 1:1 to 2:1 | Acceptable if paired with a high win-rate strategy |
| > 2:1 | Favourable — can be profitable even with a win rate below 50% |