Risk/Reward Ratio Explained
The key metric that separates profitable traders from the rest
The Risk/Reward Ratio (R/R) compares how much you're risking on a trade versus how much you could potentially gain. It's one of the most powerful concepts in trading, yet many traders ignore it.
The R/R Formula
R/R Ratio = (Target Price - Entry) / (Entry - Stop Loss)
Example: 1:3 means you risk $1 to potentially gain $3
Why R/R Matters More Than Win Rate
Here's a comparison of two traders:
Trader A: 60% Win Rate
- R/R: 1:1
- 100 trades x $100 risk
- Wins: 60 x $100 = $6,000
- Losses: 40 x $100 = $4,000
- Net: +$2,000
Trader B: 40% Win Rate
- R/R: 1:3
- 100 trades x $100 risk
- Wins: 40 x $300 = $12,000
- Losses: 60 x $100 = $6,000
- Net: +$6,000
Key Insight: Trader B makes 3x more money despite losing more often. This is the power of favorable risk/reward ratios.
Minimum R/R Recommendations
| Trading Style | Minimum R/R |
|---|---|
| Scalping | 1:1.5 |
| Day Trading | 1:2 |
| Swing Trading | 1:3 |
| Position Trading | 1:4+ |
Visualizing R/R in Our Calculator
Our calculator shows R/R ratio with a color-coded bar:
- • Red (1:0.5 - 1:1): Poor - avoid these trades
- • Yellow (1:1 - 1:2): Fair - acceptable for scalping
- • Green (1:2 - 1:3): Good - recommended minimum
- • Blue (1:3+): Excellent - ideal setup