Question 1

What is a risk-to-reward ratio (R:R)?

Accepted Answer

A risk-to-reward ratio compares the potential loss of a trade to its potential profit. It is calculated by dividing the distance from your entry to your take profit (reward) by the distance from your entry to your stop loss (risk). For example, if you enter at $100 with a stop loss at $95 (risk = $5) and a take profit at $115 (reward = $15), your R:R is 3:1. This means for every $1 you risk, you stand to gain $3. Higher R:R ratios mean you need to win fewer trades to be profitable overall.

Question 2

What is a good R:R ratio for trading?

Accepted Answer

Most professional traders aim for a minimum R:R of 2:1, meaning the potential reward is at least twice the potential risk. However, the 'best' R:R depends on your win rate. A scalper with a 70% win rate can be profitable with a 1:1 R:R, while a trend trader with a 30% win rate needs at least 3:1 to break even. The key is that your R:R and win rate together produce a positive expected value. Use the required win rate shown in this calculator to determine if your R:R makes sense given your historical win rate.

Question 3

What is expected value and why does it matter?

Accepted Answer

Expected value (EV) represents the average amount you expect to gain or lose per trade over a large number of trades. It is calculated as: EV = (Win Rate x Reward) - (Loss Rate x Risk). A positive EV means your strategy is profitable in the long run, while a negative EV means you will lose money over time regardless of short-term results. For example, with a 2:1 R:R and 45% win rate: EV = (0.45 x $200) - (0.55 x $100) = $90 - $55 = +$35 per trade. This is the single most important metric for determining if a trading strategy is viable.

Question 4

What is the required win rate and how do I use it?

Accepted Answer

The required win rate (also called break-even win rate) is the minimum percentage of winning trades needed to avoid losing money at a given R:R ratio. It is calculated as: Required Win Rate = 1 / (1 + R:R). For a 1:1 R:R, you need to win 50% of trades. For a 2:1 R:R, you need 33.3%. For a 3:1 R:R, you only need 25%. Compare this to your actual historical win rate. If your actual win rate exceeds the required rate, your strategy has a positive expected value and is worth trading. If it does not, you need to either improve your entries or widen your take profit targets.

Question 5

How does position size affect risk and reward in dollar terms?

Accepted Answer

Position size converts the percentage-based risk and reward into actual dollar amounts. If your R:R is 2:1 with a 2% risk from entry, a $10,000 position means $200 at risk and $400 potential reward. A $50,000 position on the same trade means $1,000 at risk and $2,000 potential reward. The R:R ratio stays the same, but the dollar impact changes. This is why position sizing is separate from R:R analysis. First determine if the trade has a good R:R, then use a position size calculator to determine how much capital to allocate based on your risk tolerance.

Question 6

Should I always take trades with the highest R:R?

Accepted Answer

Not necessarily. While higher R:R ratios are generally better, they often come with lower win rates because the take profit target is farther away and harder to reach. A 10:1 R:R trade that only wins 5% of the time has a negative expected value. The optimal approach is to find trades where your expected win rate significantly exceeds the required win rate for that R:R. Also consider that very tight stop losses (which inflate R:R) can cause you to get stopped out by normal market noise. The best trades balance a reasonable R:R with a realistic probability of reaching the target.

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