Risk-Reward Ratio — Trading Wiki

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What Risk-Reward Ratio means

The risk-reward ratio compares a trade's planned loss with its planned gain. A 1:3 ratio means a planned $1 loss for a potential $3 gain; it does not guarantee those fills or establish a universal professional minimum.

In depth

The risk-reward ratio (R:R or RRR) is a measurement that compares the potential loss on a trade (from entry to stop loss) against the potential gain (from entry to take profit target). Expressed as a ratio like 1:2 or 1:3, it quantifies the trade's payoff structure before entry, enabling traders to make mathematically informed decisions about which trades are worth taking. A 1:2 risk-reward ratio means that for every dollar risked, two dollars of profit are targeted. A 1:3 ratio means three dollars of potential profit for each dollar of risk. This simple metric is one of the most important concepts in trading because it directly determines the win rate required for long-term profitability.

For fixed realised payoffs before costs, a 1:1 ratio breaks even at 50% wins; profitability requires more than 50%. Planned exits do not ensure those realised payoffs. With fixed realized +2R/−1R before costs, the exact break-even rate is one third; profitability requires a higher rate. At 1:3 with fixed realised gains and losses, a win rate above 25% is required before costs; exactly 25% breaks even. This mathematical reality means that traders with mediocre win rates can still be highly profitable if their average winners are significantly larger than their average losers — a concept known as positive expectancy.

A chosen planned payoff ratio is not a universal fund rule or evidence of positive realised expectancy. The calculation is straightforward: divide the distance to your take-profit target by the distance to your stop loss. If your stop loss is $5 below entry and your target is $15 above entry, the R:R is 1:3.

Key points

• Compares potential loss (stop loss) to potential gain (take profit)
• With fixed realized +3R/−1R before costs, 25% wins breaks even; profitability requires more
• A planned ratio is not a universal professional minimum or evidence of positive expectancy

Why it matters when you are learning

Risk-reward ratio is the math that separates gambling from trading. Every trade should have the math in your favor BEFORE you enter.

Practising Risk-Reward Ratio on the simulator

Use the simulator as an observation exercise for Risk-Reward Ratio. The main feature to identify is: Compares potential loss (stop loss) to potential gain (take profit). A second feature to compare is: With fixed realized +3R/−1R before costs, 25% wins breaks even; profitability requires more. A third feature to note is: A planned ratio is not a universal professional minimum or evidence of positive expectancy. The presence of the concept is not a prediction or a trade signal. Educational simulation only — not financial advice.