A risk-reward ratio compares what a trade stands to lose against what it stands to gain. Risk £1 to make £2 and your ratio is 1:2. It is one of the few numbers that tells you how hard a strategy has to work: the better the reward for the risk, the fewer trades you need to win to stay ahead. Read together with win rate, it decides whether a system makes money — and a good ratio can carry a low win rate to a healthy profit.
What it is
Risk-reward is the size of the potential loss set against the size of the potential gain on a single trade. If the stop-loss is £100 away and the target is £200 away, you are risking £100 to make £200 — a ratio of 1:2. Written the other way round, as reward divided by risk, that is an R multiple of 2: the target is worth two times the risk.
- 1:2 or better — each win pays for two or more losses.
- 1:1 — a coin flip; you must win more than half to profit.
- Worse than 1:1 — you are risking more than you aim to make, and need a high win rate to survive.
How it works
The ratio sets the win rate you need just to break even. The maths is short:
Breakeven win rate = 1 ÷ (1 + reward/risk)
Put your R multiple in place of reward/risk and you get the fraction of trades you must win to end level, before costs. Win more often than that and you profit; less often and you lose, however good each individual trade felt.
A worked example
The breakeven win rate for a few common ratios:
- 1:0.5 (risk £2 to make £1) — break even at a 67% win rate.
- 1:1 — break even at 50%.
- 1:2 — break even at 33%.
- 1:3 — break even at 25%.
Take an EA that risks £100 to make £250, a ratio of 1:2.5. Its breakeven win rate is 1 ÷ (1 + 2.5) = 1 ÷ 3.5 = 28.6%. So it only has to win roughly 29 trades in 100 to avoid losing. At a modest 45% win rate its expectancy is (0.45 × £250) − (0.55 × £100) = £112.50 − £55 = +£57.50 per trade. Losing most of its trades, it still compounds.
Why it matters
The table is the whole argument for why a low win rate is not a problem. A 1:3 system that wins a third of the time is comfortably profitable, because the winners are three times the losers. This is why trend and breakout EAs, which are wrong more often than right, can outperform scalpers that win nine times in ten. Risk-reward tells you how much a win is worth; win rate tells you how often it arrives. You need both to know whether the account grows.
Common misconceptions
- Claimed RR is not realised RR. A vendor quotes the ratio set at entry — the distance to the stop and the target. What you live on is the ratio the closed trades actually delivered, after slippage, missed targets and partial fills. The realised figure is usually worse.
- Moving the stop rewrites the ratio. A "1:3" that keeps nudging its stop wider, or trails to breakeven and gets tapped out, was never really 1:3. Judge the ratio the exits produced, not the one the entry promised.
- One outlier skews the average. A single monster winner can drag the mean RR up. Look at the spread of trades rather than the average alone.
- RR alone proves nothing. A 1:10 ratio that wins 5% of the time loses money. Always pair it with the win rate the table demands.
The Karnek note
Karnek derives realised risk-reward from the actual closed trades on your terminal, not the ratio a vendor set at entry, on the same labelled window as the win rate and expectancy beside it. Because every figure is computed from the same live trade population, a claimed 1:3 that only delivered 1:1.2 shows up as exactly that. Karnek reads the terminal and nothing more — it can measure the ratio, but never place a trade or move a stop.
Written and reviewed by the Karnek Research team. Last updated August 2026.
Educational content only - not financial advice. Past performance does not predict future results. Trading carries significant risk.