Trading glossary

What is the risk-reward ratio?

The risk-reward ratio compares how much a trade could lose, to its stop, with how much it could gain, to its target.

If a trade risks 20 pips to a stop and targets 60 pips, its risk-reward ratio is 1:3. The ratio says nothing about how likely the target is, only how the potential outcomes compare.

Ratio and win rate work together. A lower win rate needs a higher reward relative to risk to break even, and the reverse.

How traders use it

Measure risk from entry to invalidation and reward from entry to a realistic target.
Use structural targets, such as the next level, rather than a fixed multiple.
Skip ideas where the nearest opposing level leaves too little room.

Example

Buying EURUSD at 1.0850 with a stop at 1.0830 risks 20 pips. The next resistance is at 1.0910, 60 pips away. The risk-reward ratio is 1:3. If the next resistance were at 1.0865, it would only be 1:0.75.

Frequently asked questions

What is a good risk-reward ratio?

There is no universal number. It has to be judged together with how often the setup reaches its target.

Is 1:2 the minimum?

It is a common rule of thumb, not a requirement.

Educational content only, not financial advice. Chart patterns describe probabilities, not certainties, and every pattern can fail. See our disclaimer.