The ratio compares what you plan to gain on a trade with what you plan to lose. It is calculated before entry from three prices: entry, stop loss and take profit. It tells you how often a setup must work to break even: the larger the reward relative to the risk, the lower the win rate you need.
Example
Long BTC at $60,000, stop at $59,400, target at $61,800. The risk is $600 and the reward $1,800, so the reward-to-risk is 3:1 and the break-even win rate is 1 ÷ (1 + 3) = 25%. With a 0.05% taker fee on entry and exit, the reward drops to about $1,740 and the risk grows to about $660, so the break-even rises to about 27.5%.
Why it matters
The ratio links your exits to the win rate you need. A strategy at 1:1 must win more than half the time; a strategy at 3:1 can be profitable winning one trade in three. Knowing this stops you from judging a setup by its win rate alone.
Common mistake
Placing far targets just to show a high ratio. Distant targets are hit less often, so the win rate falls. What counts is expectancy, the combination of ratio and win rate, measured on your real trades.
Put it into practice
FAQ
- What is a good risk-reward ratio?
- There is no single number. A 1.5:1 setup that wins 55% of the time beats a 4:1 setup that wins 15%. Judge the ratio together with the win rate your journal shows for that setup.
- Is it written 1:3 or 3:1?
- Both are used. Risk to reward 1:3 and reward to risk 3:1 describe the same trade: the reward is three times the risk.
- How do I calculate the break-even win rate?
- 1 ÷ (1 + reward-to-risk). At 2:1 that is about 33%; at 3:1 it is 25%. Fees and slippage push it higher.