Risk-to-Reward Ratio

What is Risk-to-Reward Ratio in Trading?

The risk-to-reward ratio (sometimes called the reward-to-risk ratio) is a way to compare how much money you could lose in a trade versus how much you could gain. It helps traders decide if a trade is worth taking.

In simple terms, it answers this question: “How many Dollars am I risking to make a possible profit?”

Example of Risk-to-Reward Ratio

Suppose you buy EURUSD at 1.10201:

• You set a stop-loss at 1.10101 (risking 10 pips).
• You set a take-profit at 1.10401 (aiming for 20 pips).

This means you are risking 10 pips to potentially make 20 pips.

• Your Risk-to-Reward ratio is 1:2 (risking 1 to earn 2).

Risk-to-Reward Ratio Formula

The basic risk-to-reward ratio formula is:

Risk-to-Reward Ratio = Potential Loss ÷ Potential Profit

Or simply, compare the size of your stop-loss to your profit target.

What is a Good Risk-to-Reward Ratio?

There is no single perfect answer, but many traders consider 1:2 or 1:3 a good ratio. This means for every 1 Dollar risked, they aim to make 2 or 3 Dollars in return.

Even if not all trades win, using a positive ratio with a high enough success rate helps traders stay profitable over the long run and manage risk.

How to Measure Risk-to-Reward

• Risk-to-Reward Ratio Calculator: Helps traders quickly see if their trade setup is worth it.
• Risk-to-Reward Ratio Chart: Shows visually how much risk vs reward is planned before entering a trade.