Risk to Reward Ratio
Your risk to reward ratio compares how much you stand to lose on a trade against how much you are aiming to gain. If you risk 20 pips to target 40 pips, your ratio is 1:2, meaning the potential reward is twice the size of the risk. It is one number, written risk first, and it tells you whether a trade is worth taking before you even think about whether it will work out.
What it is
The risk to reward ratio is the distance from your entry to your stop loss, compared to the distance from your entry to your target. Your stop loss is the price where you accept the trade is wrong and exit. Your target is the price where you plan to take the gain.
Say you buy EUR/USD at 1.0850. You place a stop at 1.0830, which is 20 pips below, and a target at 1.0890, which is 40 pips above. You are risking 20 pips to make 40, so the ratio is 1:2. The risk side is always written first.
Traders often shorten this to "R". Your risk is 1R, so a 1:2 trade has a target of 2R. Talking in R lets you compare trades without worrying about the pair, the lot size, or the account. A 1:3 setup on EUR/USD and a 1:3 setup on GBP/JPY are the same shape, even if the pip values differ.
Why it matters
Risk to reward matters because you will not be right every time. No one is. The ratio decides how much your wins need to outweigh your losses for the math to hold together over many trades.
This ties into expectancy, which is your average result per trade once wins and losses are blended together. With a 1:2 ratio, a single win covers the loss from two losing trades, so you do not need to be right most of the time for the numbers to make sense. With a 1:1 ratio, you would need to win well over half your trades just to break even after costs.
Knowing this protects you. Trading is risky and most retail traders lose money, often because a few oversized losses erase a long string of small wins. A sensible ratio is one of the few things you control completely before the market does anything.
How to use it
Set the ratio before you enter, not after. First decide where price proves you wrong and put your stop there, based on the chart rather than on the gain you wish for. Then measure to a realistic target and check the ratio that results.
Many traders treat 1:2 as a baseline and skip setups that offer less. The logic is simple. If a trade only offers 1:1 or worse, the reward is too thin to justify being wrong as often as you inevitably will be. This is a common rule, not a law, and the right number depends on how often your approach actually wins.
Keep the pips honest. On EUR/USD a 5 pip stop is usually too tight and will get knocked out by normal noise, while a 200 pip target on a quiet day may never be reached. Pick a stop the chart supports, measure the target the same way, and let the ratio be the result of those two real levels rather than a number you forced.
Common mistakes
The biggest mistake is widening your stop to keep a trade alive. If price moves against you and you push the stop further away, you quietly turn a 1:2 trade into a 1:1 or worse, and you risk more than you ever agreed to. Decide the stop once and leave it.
The opposite mistake is chasing huge ratios like 1:10 on every trade. They look attractive, but a target that far away rarely gets hit, so you win too seldom for the ratio to help. A reachable 1:2 beats a fantasy 1:10.
Finally, do not judge ratio in isolation. A 1:3 setup is only good if your approach hits its targets often enough to make it work. Risk to reward and win rate are two halves of the same picture, and expectancy is what joins them. These habits, sizing risk and staying disciplined, carry over to any market, though the teaching here is forex.
Common questions
What is a good risk to reward ratio for beginners?
Many traders use 1:2 as a baseline, meaning you aim for twice what you risk. There is no single correct number. It depends on how often your approach wins, but starting around 1:2 keeps you from needing to be right most of the time.
What does R mean in trading?
R is shorthand for your initial risk on a trade. If you risk 20 pips, that is 1R, so a target of 40 pips is 2R. Talking in R lets you compare trades across different pairs and position sizes.
Can I just use a high risk to reward ratio and win less often?
In theory a higher ratio means you can win less often and still break even, but very wide targets often never get reached. A reachable 1:2 or 1:3 usually works better than an unrealistic 1:10 that rarely fills.
How is risk to reward different from win rate?
Win rate is how often you win. Risk to reward is how big a win is compared to a loss. They work together. Expectancy combines both into your average result per trade, so neither number means much on its own.
Reading about it is step one.
The free first five modules put this on a real chart and make you do the work, not just read about it. No card required.