Risk-Reward Ratio

The risk-reward ratio (R:R or RRR) compares how much you stand to lose versus how much you could gain on a trade.

How to Calculate

Risk-Reward Ratio = Potential Loss / Potential Gain

A 1:3 risk-reward means you risk $1 to potentially make $3.

Example

• Entry: $100
• Stop loss: $98 (risking $2)
• Take profit: $106 (targeting $6)
• R:R = 1:3

Why It Matters

With a 1:3 R:R, you only need to win 25% of your trades to break even (before commissions). Higher R:R ratios give you more room for losing trades while staying profitable.

| R:R | Break-Even Win Rate |

|-----|--------------------|

| 1:1 | 50% |

| 1:2 | 33% |

| 1:3 | 25% |

| 1:4 | 20% |

Common Mistakes

• Moving take profit closer: Reduces R:R and long-term edge
• Moving stop loss further: Increases risk without improving the setup
• Ignoring probability: A 1:10 R:R trade that wins 5% of the time is still a losing strategy

For Prop Firm Traders

Aim for a minimum 1:2 R:R during evaluations. This creates a buffer — even with a 40% win rate, you'll be net profitable and less likely to breach drawdown limits.