Forex Risk-to-Reward Ratio Explained
Risk-to-reward ratio compares how much you stand to lose against how much you stand to gain on a trade before you ever enter it.
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Risk-to-reward ratio is a simple comparison, made before entering a trade, between how much you are risking if it goes wrong and how much you stand to gain if it goes right. It is usually written as a ratio like 1:2 or 1:3, where the first number represents the risk and the second the potential reward, scaled to the same unit.
How it is calculated
Risk is the distance, in pips or dollars, between your entry price and your stop-loss. Reward is the distance between your entry price and your take-profit target. Dividing reward by risk gives the ratio. If your stop-loss is 30 pips away and your take-profit target is 90 pips away, your risk-to-reward ratio is 30:90, simplified to 1:3 — you stand to make three times what you are risking if the trade reaches its target.
Why this ratio matters independently of win rate
A trade’s profitability over time depends on two things together: how often trades win, and how much is made or lost on wins versus losses. Risk-to-reward ratio speaks to the second part. A strategy does not need to win most of the time to be sound if its winning trades are large relative to its losing trades. For example, a strategy that wins only 40% of the time but maintains a 1:3 risk-to-reward ratio can still come out ahead over a large number of trades, because the gains from winners outweigh the losses from the more frequent losers. Conversely, a strategy that wins 60% of the time but risks far more than it targets on each trade can still lose money overall if the losing trades are large enough.
A side-by-side comparison
Consider two traders, each making ten trades of equal size, each risking $100 per trade:
- Trader A uses a 1:1 ratio (risking $100 to make $100) and wins 6 of 10 trades: 6 × $100 − 4 × $100 = $200 net.
- Trader B uses a 1:3 ratio (risking $100 to make $300) and wins only 4 of 10 trades: 4 × $300 − 6 × $100 = $600 net.
Trader B wins less often but ends up ahead by more, purely because of the ratio between what is risked and what is targeted on each trade. This is why risk-to-reward ratio and win rate always need to be considered together, not separately — neither one alone tells you whether a trading approach makes sense.
Setting a sensible ratio in practice
There is no single ratio that is correct for every trade or every strategy, and it depends heavily on the method being used to enter trades in the first place — some approaches naturally produce higher win rates with smaller targets, others naturally produce lower win rates with larger targets. What matters is being deliberate about the ratio before entering a trade, rather than setting a stop-loss and take-profit arbitrarily and only noticing the ratio after the fact.
How leverage interacts with risk-to-reward
Leverage changes the dollar size of both the risk and the reward sides of the ratio equally, since it scales the whole position. It does not change the ratio itself. This is an important distinction: increasing leverage does not improve your risk-to-reward profile on a trade, it only increases the absolute dollar amounts involved on both sides — which is also why leverage, risk-to-reward and position sizing need to be thought about as one connected system rather than three separate topics.
Key takeaways
- Risk-to-reward ratio compares the distance to your stop-loss against the distance to your take-profit, set before the trade is entered.
- A favorable ratio can make a strategy profitable even with a win rate below 50%, and an unfavorable one can erode profits even with a win rate above 50%.
- Leverage scales the dollar amounts on both sides of the ratio equally — it does not improve the ratio itself.