Risk to reward ratio: how often you can afford to be wrong
What a risk to reward ratio actually is, the win rate each ratio needs to break even, and why chasing big ratios can quietly make you worse.
A risk to reward ratio compares what you lose if the trade fails against what you make if it works. If you risk one hundred to make three hundred, that is one to three. Its real use is not that bigger is better. Its real use is that it tells you exactly how often you are allowed to be wrong and still come out ahead, which turns trading from a guessing game into an arithmetic one.
How do you read the number?
Risk is the distance from your entry to your stop. Reward is the distance from your entry to your target. Divide the second by the first and you have the ratio.
Entry at 100, stop at 95, target at 115. You are risking 5 to make 15. That is one to three.
Notice that the ratio is measured in price distance, not in money. The money follows from your position size, which follows from the stop distance. Ratio and sizing are separate jobs. Confusing them is where a lot of people go wrong.
The break-even table
This is the part worth memorising, because it reframes everything. Each ratio has a minimum win rate you need just to stay flat before costs:
| Risk to reward | Break-even win rate | You can be wrong |
|---|---|---|
| 1 to 1 | 50% | half the time |
| 1 to 1.5 | 40% | 6 times in 10 |
| 1 to 2 | 33% | 2 times in 3 |
| 1 to 3 | 25% | 3 times in 4 |
| 1 to 5 | 17% | more than 4 times in 5 |
Read the right-hand column again. At one to three you can lose three quarters of your trades and still not be losing money. That is the whole reason experienced traders sound so relaxed about being wrong. They are not being brave. They have done this sum.
It also explains why a high win rate is a bad thing to optimise for on its own. A strategy that wins ninety percent of the time while risking ten to make one is a slow-motion accident. One bad trade erases nine good ones, and the bad trade always arrives.
Why bigger is not automatically better
Here is the trap. If one to three is good, one to ten must be excellent. So people move their targets further and further out.
The problem is that reward is not free. A target only counts if price actually gets there. Push it far enough away and you are no longer trading a plan, you are buying a lottery ticket with a stop attached. Your win rate collapses faster than your ratio improves, and the expectancy goes negative while the numbers on your spreadsheet look ambitious.
The honest version of this is that the ratio and the win rate are linked. You cannot change one without moving the other. Widening a target lowers the odds it gets hit. Tightening a stop raises the odds it gets hit. Every adjustment trades one for the other, and the only question that matters is whether the combination comes out positive over many trades. That combined number is expectancy, and I have written about how to calculate it in expectancy: how to tell if a strategy is actually working.
Where should the target come from?
Same principle as the stop: the chart, not your preferences.
A target belongs where price has a real reason to struggle. The obvious candidates are prior highs or lows, an area that has rejected price several times, the edge of a range, or a level that a lot of participants are clearly watching. If you bought a breakout from a range, the height of that range projected upward is a defensible first target because it is derived from something that actually happened rather than from a number you liked.
What a target should not be is your risk multiplied by three. Setting the target by multiplying the stop is backwards. It puts your exit at a price with no meaning, for the same reason a stop at a comfortable dollar figure has no meaning. I went through that logic in detail in where to place a stop loss.
So the sequence is: find the invalidation level, find the realistic target from structure, then calculate what ratio that combination gives you. If the answer is poor, you do not adjust the levels. You skip the trade. There will be another one.
The minimum I will accept
I want at least one to two before costs on a swing trade, and I would rather have one to three. Below one to two the maths gets uncomfortable: you need to be right more than half the time, forever, while paying spreads and commissions out of the middle.
That threshold does two useful things. It filters out a lot of mediocre setups automatically, and it removes the argument from the moment of entry, when I am least objective. The rule is set on a quiet evening, not while a chart is moving.
What the ratio quietly does to your behaviour
This is the part people underrate. Once you genuinely accept that a one to three strategy loses three trades out of four, a losing streak stops feeling like evidence that you are broken. It starts feeling like the weather. You expected this. It is in the table.
That single shift removes most of the fuel behind revenge trading and abandoning a system two weeks in. I wrote about the behavioural side of this in the psychology of trading around a job, and about what a normal bad run actually looks like in drawdown: what a normal losing streak looks like.
Costs, and why they belong in the calculation
Every ratio above is before costs. Spread, commission, and slippage all come out of the reward and add to the risk, and they hurt proportionally more on tight stops and small targets.
If your average trade risks 50 and targets 100, and round-trip costs are 5, your real ratio is closer to one to 1.9 than one to 2. That is survivable. If you are risking 10 to make 20 on the same costs, the same 5 has eaten a quarter of the trade. Small targets and small accounts are where costs quietly do the damage, which is one more argument for fewer, larger, better trades.
What to do with this
Go back through your last thirty trades and write down the planned ratio for each, then the actual outcome. Two things usually fall out. The first is that the planned ratio and the realised one are different, because targets get taken early out of nerves. The second is that the ratio you thought you were trading is not the one you were actually trading.
That gap is the useful finding, and it only shows up if you are logging trades in the first place. The columns I use are in why your trading journal beats your next strategy.
Key takeaways
- The ratio compares the distance from entry to stop against the distance from entry to target, measured in price, not money.
- Each ratio has a break-even win rate. At one to three you can lose three trades in four and still not be losing money.
- A high win rate on its own is not a good sign. Risking ten to make one wins often and ends badly.
- Bigger is not automatically better. Pushing a target further out lowers the odds it is ever reached.
- Take the target from structure, never from your risk multiplied by an arbitrary number. If the ratio is poor, skip the trade rather than move the levels.
The full framework, with how the ratio interacts with sizing across a week of trades, is in The 9-to-5 Trader.
Educational only, not financial advice. Trading carries a real risk of loss.
The whole method, in one place
These notes are pieces of the system in The 9-to-5 Trader. Start with the free tools, or read the book.