Reward-to-Risk Ratio — The Number That Matters Most

Most new traders are obsessed with win rate. They want to be right 70%, 80%, 90% of the time. It feels logical — more winners means more money. But this fixation on win rate misses the number that actually determines whether you make or lose money over time: the reward-to-risk ratio.

The Simple Maths

Imagine two traders. Trader A wins 70% of their trades, but their average winner is £30 and their average loser is £100. Trader B wins only 40% of their trades, but their average winner is £200 and their average loser is £80.

Over 100 trades, Trader A makes: (70 × £30) − (30 × £100) = £2,100 − £3,000 = −£900. They're losing money despite a 70% win rate.

Over 100 trades, Trader B makes: (40 × £200) − (60 × £80) = £8,000 − £4,800 = +£3,200. They're profitable despite being wrong more than half the time.

The difference is reward-to-risk. Trader B's average winner is 2.5 times their average loser. This ratio more than compensates for the lower win rate.

What Is Reward-to-Risk Ratio?

The reward-to-risk ratio (often written as R:R) compares the potential profit of a trade to the potential loss. If your target is 60 pips and your stop loss is 30 pips, you have a 2:1 R:R. If your target is 90 pips and your stop is 30 pips, it's 3:1.

A 2:1 ratio is a widely used benchmark in trading education, and for good reason. At 2:1, you only need to win one trade out of three to break even. Win more than 33.3% and you're profitable. Most reasonable trading systems with a genuine edge can achieve win rates well above that threshold.

Expectancy: The Complete Picture

Expectancy combines win rate and reward-to-risk into a single number that tells you how much you can expect to make per trade, on average. The formula is: (Win Rate × Average Win) − (Loss Rate × Average Loss).

A positive expectancy means your system makes money over time. A negative expectancy means it loses money. No amount of clever trading, intuition, or hope changes the maths. If your expectancy is negative, you will lose. If it's positive, you will win — provided you have enough trades for the statistics to play out.

This is exactly why backtesting matters. You need enough data to know your system's expectancy before you risk real money. A sample of 100+ trades gives you a reasonable estimate. Anything less and you're guessing.

How R:R Affects Your Trading Psychology

A high reward-to-risk ratio does something powerful for your psychology: it gives you permission to be wrong. If you know that one winner covers two or three losers, a losing trade becomes manageable. It's not a crisis — it's just part of the maths.

Traders who target 1:1 or worse live in a constant state of anxiety because every loss hurts proportionally more. They need to be right most of the time just to stay afloat, which creates pressure that leads to poor decisions — cutting winners early, letting losers run, skipping valid setups out of fear.

Setting Realistic Targets

The trade-off with higher R:R targets is that your win rate will typically be lower. A 3:1 target is harder to hit than a 1:1 target, because price has to move further in your favour. The sweet spot for most systems is somewhere between 1.5:1 and 3:1, depending on the market conditions and timeframe.