Risk Reward Ratio Explained
The risk/reward ratio is the most important metric for evaluating trade quality. Learn how to calculate it and why professional traders never take trades below 1:2.
Calculate your risk/reward ratio instantly with our profit calculator.
Open Profit CalculatorWhat is Risk/Reward Ratio?
The risk/reward ratio compares the potential profit of a trade to its potential loss. A ratio of 1:2 means you stand to make $2 for every $1 you risk.
The Risk/Reward Formula
Risk/Reward Ratio = Potential Profit ÷ Potential LossRisk/Reward Calculation Examples
Example 1: Long Trade
Entry Price: $50,000
Stop Loss: $48,000 (risking $2,000 per BTC)
Take Profit: $56,000 (potential gain $6,000 per BTC)
R:R = $6,000 ÷ $2,000
Risk/Reward = 1:3
Example 2: Short Trade
Entry Price: 1.1000
Stop Loss: 1.1050 (risking 50 pips)
Take Profit: 1.0900 (potential gain 100 pips)
R:R = 100 pips ÷ 50 pips
Risk/Reward = 1:2
Why Risk/Reward Ratio Matters
| Risk/Reward | Required Win Rate | Verdict |
|---|---|---|
| 1:1 | 50% | Breakeven |
| 1:2 | 33% | Good |
| 1:3 | 25% | Excellent |
| 1:4 | 20% | Outstanding |
Using Multiple Take Profit Levels
Many traders use multiple take profit targets to optimize their average R:R:
- TP1 (50%): 1:1 - Lock in some profit
- TP2 (30%): 1:2 - Secure good returns
- TP3 (20%): 1:4+ - Let winners run
Expected Value: The Complete Picture
EV = (Win Rate × Reward) - (Loss Rate × Risk)