# What Is Risk-Reward Ratio and Why It Matters > Risk-reward ratio is one of the most cited concepts in trading and one of the most misunderstood. Here is what it actually means and how it affects your profitability. **Tags:** risk-reward, ratio, money-management, trading-fundamentals **URL:** https://traderjournal.app/money-management/what-is-risk-reward-ratio-and-why-it-matters --- # What Is Risk-Reward Ratio and Why It Matters Risk-reward ratio (R:R) is the relationship between how much you stand to lose if a trade hits your stop loss and how much you stand to gain if it hits your take profit. It is expressed as a ratio like 1:2 or 1:3, meaning for every dollar risked, you target two or three dollars in return. This ratio, combined with your win rate, determines whether a trading strategy is profitable over time. --- ## How to Calculate R:R Risk = distance from entry to stop loss (in pips or dollars) Reward = distance from entry to take profit (in pips or dollars) R:R = Reward / Risk **Example:** Entry: 1.0850 Stop loss: 1.0820 (30 pips below entry) Take profit: 1.0940 (90 pips above entry) Risk = 30 pips Reward = 90 pips R:R = 90/30 = 3.0 (expressed as 1:3) --- ## Why R:R Matters More Than Win Rate Alone Win rate tells you how often you are right. R:R tells you how much you make when you are right versus how much you lose when you are wrong. A trader with a 40% win rate and 1:2.5 R:R is profitable: - 40 winning trades x 2.5 units = 100 units gained - 60 losing trades x 1 unit = 60 units lost - Net: +40 units A trader with a 70% win rate and 1:0.5 R:R is losing money: - 70 winning trades x 0.5 units = 35 units gained - 30 losing trades x 1 unit = 30 units lost - Net: +5 units (barely positive, and commission/spread will likely make it negative) The lesson: you can be wrong on most trades and still make money if your winners are large relative to your losers. Conversely, you can be right most of the time and still lose money if your losers are larger than your winners. --- ## The Minimum Viable R:R The minimum R:R required to be profitable depends on your win rate: | Win Rate | Minimum R:R to Break Even | |---|---| | 60% | 0.67:1 | | 55% | 0.82:1 | | 50% | 1.00:1 | | 45% | 1.22:1 | | 40% | 1.50:1 | | 35% | 1.86:1 | If your win rate is 50%, you need at least a 1:1 R:R to break even (before costs). After spread and commission, you need better than 1:1 to actually profit. Most professional traders aim for a minimum of 1:1.5 to 1:2, which allows profitability even with win rates in the 40-50% range. --- ## Planned R:R vs Realized R:R There is an important distinction between the R:R you plan at entry and the R:R you actually realize. You enter a trade planning a 1:3 R:R. Price reaches 1:1.5 and you close manually because "it looks like it might reverse." Your realized R:R is 1:1.5, not 1:3. If this pattern occurs consistently - taking profits at half the intended target - your planned R:R is irrelevant. Your realized R:R is what determines your actual performance. Your journal tracks both. The risk-reward visualizer in Trader Journal shows your planned R:R (entry, stop, target as price levels). Your actual P&L shows the realized result. Comparing these across your trade history reveals whether your exit management matches your planning. --- ## The Trap of Forcing R:R Some traders set artificial R:R targets regardless of market structure. "I only take trades with a minimum 1:3 R:R" sounds disciplined but can lead to unrealistic take profit placements - targets set in the middle of major resistance, ignoring the structure that would prevent price from reaching them. A 1:2 R:R with a realistic take profit at a logical structural target is more valuable than a forced 1:3 with a target that price rarely reaches. The R:R ratio is a tool for evaluating trade quality. It should guide target placement, not override it. --- The risk-reward visualizer in Trader Journal shows your planned R:R on every trade with a visual diagram. Download at android.traderjournal.app or ios.traderjournal.app.