Risk reward ratio is a trading concept that compares the estimated amount you plan to risk with the estimated amount you plan to gain on a single trade.
It is one of the main tools traders use to understand the relationship between their stop loss and their take profit before opening a position. A risk reward ratio does not predict if a trade will win, but it helps show whether the potential reward justifies the potential risk according to the trader’s plan.
What Does Risk Reward Ratio Mean?
Risk reward ratio means the relationship between your planned risk and your planned reward.
It answers a simple question:
“For every unit of risk I take, how many units of reward am I aiming for?”
If a trader risks $50 to make $100, the ratio is 1:2. The planned reward is twice the size of the planned risk.
Why Risk Reward Ratio Matters
Risk reward ratio helps organize a trade plan before execution. Instead of guessing how much money they might make or lose, a trader can use entry price, stop loss, and take profit to measure the setup.
| Trade Plan | Risk | Reward | Risk Reward Ratio |
|---|---|---|---|
| Trade A | $50 | $100 | 1:2 |
| Trade B | $50 | $50 | 1:1 |
| Trade C | $50 | $25 | 1:0.5 |
Risk Reward Ratio Formula
The basic risk reward ratio formula compares the risk amount to the reward amount.
Risk Reward Ratio = Risk Amount : Reward AmountRisk Reward Ratio Example
Let’s use an educational example for a long trade on EUR/USD.
Assume:
- Entry price: 1.1000
- Stop loss: 1.0950
- Take profit: 1.1100
Risk Reward Ratio vs Win Rate
A common trading idea is that risk reward ratio and win rate are connected. A strategy with a very high risk reward ratio (like 1:5) may naturally have a lower win rate because a far target is harder to hit. A strategy with a lower risk reward ratio (like 1:1 or 1:0.5) may have a higher win rate because the target is closer.
| Concept | Meaning |
|---|---|
| Risk Reward Ratio | Compares planned loss with planned profit |
| Win Rate | Measures how often trades are profitable |
| Position Size | Measures how large the trade is |
| Expectancy | Combines win rate, average win, and average loss |
Risk Reward in Forex, Crypto, and Gold
The concept of risk reward applies across markets, but the way it is calculated can vary.
Common Beginner Mistake
A common beginner mistake is choosing a take-profit target only to create a good-looking risk reward ratio.
For example: "I want a 1:3 trade, so I will put my take profit very far away."
If the target is not based on market structure, volatility, or a realistic price area, the ratio may look good on paper but may not be useful in practice.
Ignoring position size is another mistake. A 1:2 ratio trade can still cause a massive account loss if the position size is too large.
Risk reward ratio should be used with stop loss planning, take profit planning, position size, market conditions, spread/fees, and broker/exchange rules.
When to Use the Risk Reward Calculator
Open Risk Reward Calculator
Key Takeaways
Summary
- Risk reward ratio compares planned risk with planned reward.
- It is usually based on entry price, stop loss, and take profit.
- A 1:2 ratio means the planned reward is twice the planned risk.
- The ratio does not predict whether a trade will win.
- Risk reward should be used with position sizing, fees, volatility, and market context.
- Forex, crypto, and gold calculations may vary by broker, exchange, instrument, and account type.
- A risk reward calculator is useful for reference calculations, not financial advice.