Risk-Reward Ratio Explained: How to Plan Better Trades

Many traders focus on how often they're right. But a strategy that wins 70% of the time can still lose money if its losses are much bigger than its wins. The risk-reward ratio helps you plan trades so the maths works in your favour.

What is the risk-reward ratio?

It compares how much you could lose on a trade with how much you could make. If your stop-loss is 20 pips away and your take-profit is 40 pips away, you're risking 20 to make 40, a ratio of 1:2.

Risk-reward = distance to stop-loss : distance to take-profit

Win rate and breakeven

Your risk-reward ratio decides how often you need to win just to break even (before costs):

• 1:1 → you need to win 50% of trades
• 1:2 → you need to win about 33%
• 1:3 → you need to win 25%
• 2:1 (risking 2 to make 1) → you need to win about 67%

The formula is breakeven win rate = risk ÷ (risk + reward).

A worked example

Over 10 trades you risk $100 per trade with a 1:2 ratio. You win 4 and lose 6. Wins: 4 × $200 = $800. Losses: 6 × $100 = $600. Net result: +$200, despite losing more trades than you won.

How to use it

1. Find your stop first. Put it where your trade idea is clearly wrong, not at an arbitrary distance.
2. Find a realistic target. Look for nearby support or resistance, recent highs or lows, or an average daily range.
3. Check the ratio. If the target is too close to justify the risk, skip the trade.
4. Size the position. Use the position size calculator so the stop equals your planned risk.

Common mistakes

• Chasing huge ratios. A 1:10 target that's rarely reached isn't better than a realistic 1:2.
• Moving the stop further away when price approaches it. This quietly destroys your ratio.
• Closing winners early out of fear, while letting losers run to the stop.
• Ignoring costs. Spread and commission reduce your real reward, especially on short-term trades.

Plan your next trade's outcome with our profit calculator, and learn more in our guide to calculating position size.

CFDs are leveraged products and you can lose your money. This article is for education only and is not investment advice.