Risk-Reward Ratio (R:R) is the single most important concept in trading. It determines whether you can be profitable even with a 40% win rate — or lose money even with a 70% win rate.
Yet most traders either don't calculate it, calculate it wrong, or ignore it entirely. This guide will fix that.
What Is Risk-Reward Ratio?
R:R measures how much you stand to gain versus how much you stand to lose on any given trade.
Formula
R:R = (Target - Entry) / (Entry - Stop Loss)
For long trades. Reverse for shorts.
Simple Example
ENTRY
$100
STOP LOSS
$95
Risk: $5
TARGET
$115
Reward: $15
R:R = $15 / $5 = 1:3 — You risk $5 to make $15. This is a good trade.
Why R:R Matters More Than Win Rate
This is the part most traders get wrong. They obsess over win rate, but R:R determines profitability:
| Win Rate | R:R Ratio | 100 Trades ($1K risk) | Result |
|---|---|---|---|
| 70% | 1:0.8 | 70 × $800 - 30 × $1,000 | +$26,000 |
| 40% | 1:3 | 40 × $3,000 - 60 × $1,000 | +$60,000 |
| 50% | 1:2 | 50 × $2,000 - 50 × $1,000 | +$50,000 |
The trader with 40% win rate and 1:3 R:R makes more than the trader with 70% win rate. This is the math that changes everything.
“You don't need to be right most of the time. You need to make more when you're right than you lose when you're wrong.”
The Minimum R:R You Should Accept
Professional traders typically won't take a trade below 1:2 R:R. Here's a guideline:
- 1:1 — Break even territory. You need >50% win rate just to survive fees.
- 1:2 — The minimum for most professionals. Profitable at 40%+ win rate.
- 1:3+ — The sweet spot. Profitable even with poor win rates.
Common R:R Mistakes
Setting Unrealistic Targets
A 1:10 R:R sounds amazing until you realize your target never gets hit. Your R:R must be realistic based on market structure — the next support/resistance, not an arbitrary number.
Moving Your Stop Loss
You set a 1:2 trade, but when price approaches your stop, you widen it “just a little.” Now your R:R is 1:0.5 and you've destroyed your edge.
Not Tracking Actual vs. Planned R:R
Your planned R:R might be 1:2, but if you consistently exit early, your actual R:R could be 1:0.8. The only way to know is to track it.
How to Track R:R in Your Journal
In MYTradesBook, R:R is calculated automatically for every trade. You can:
- See your average R:R across all trades
- Compare planned vs. actual R:R
- Filter by setup to find which strategies give the best R:R
- Track R:R trends over time on your progress page
When you can see that your FVG setup averages 1:2.8 R:R but your BOS setup only gives 1:0.9, the decision on which to focus becomes obvious.
Key Takeaways
- 1. R:R matters more than win rate for long-term profitability
- 2. Never take a trade below 1:2 R:R unless you have data proving it works
- 3. Track actual R:R, not just planned — early exits destroy your edge
- 4. Use a journal to identify which setups give the best R:R
- 5. Let winners run. A 1:3 trade can absorb two 1:1 losses and still be profitable
Master R:R, and you master the math of trading.