What is Risk/Reward Ratio in Forex Trading?
Quick Answer: Risk/Reward Ratio (R:R) compares your potential profit to potential loss on a trade. A 2:1 R:R means you risk $100 to potentially make $200. Professional traders aim for minimum 2:1 ratios, which allows profitability even with 50% or lower win rates.
Understanding Risk/Reward Ratio
The Risk/Reward Ratio (R:R) compares the potential profit of a trade to the potential loss. It's expressed as a ratio like 2:1 or 3:1, where the first number is your potential reward and the second is your risk.
How to Calculate Risk/Reward Ratio
Risk/Reward Formula:
R:R Ratio = (Take Profit Distance) / (Stop Loss Distance)
Practical R:R Examples
2:1 Risk/Reward
Entry: 1.1000 | Stop Loss: 1.0980 (20 pips) | Take Profit: 1.1040 (40 pips) | Risking $20 to make $40
3:1 Risk/Reward
Entry: 1.2500 | Stop Loss: 1.2450 (50 pips) | Take Profit: 1.2650 (150 pips) | Risking $50 to make $150
1:2 Risk/Reward (Bad)
Entry: 1.0800 | Stop Loss: 1.0750 (50 pips) | Take Profit: 1.0825 (25 pips) | Risking $50 to make $25 (avoid this!)
Why Risk/Reward Ratio Matters
R:R ratio determines your long-term profitability:
- Win rate requirement - Higher R:R means you need fewer winning trades to profit
- Psychological benefit - Allows you to lose more trades than you win and still profit
- Consistent edge - Forces disciplined trading with favorable odds
- Protects capital - Ensures winners are larger than losers
Win Rate vs Risk/Reward
Understanding the breakeven relationship:
| Risk/Reward | Breakeven Win Rate | Profitability |
|---|---|---|
| 1:1 | 50% | Need 50% wins to break even |
| 2:1 | 33% | Need only 33% wins to break even |
| 3:1 | 25% | Need only 25% wins to break even |
| 1:2 | 67% | Need 67% wins just to break even! |
Recommended Risk/Reward Ratios
Professional trader standards:
- Minimum acceptable: 1.5:1 (risk $100 to make $150)
- Good ratio: 2:1 (risk $100 to make $200)
- Excellent ratio: 3:1 or higher (risk $100 to make $300+)
- Avoid: Any ratio below 1:1 (risking more than you can gain)
Setting Realistic R:R Targets
How to plan trades with good risk/reward:
Identify Support/Resistance
Place stop beyond support/resistance, target next major level for 2:1+ ratio
Use Price Action Context
Don't force unrealistic targets - respect chart structure
Trade High Timeframes
Daily/4H charts offer better R:R opportunities than 5-minute charts
Skip Poor Setups
If you can't get at least 1.5:1 R:R, don't take the trade
The 10-Trade R:R Comparison
✓ 2:1 R:R with 40% Win Rate
10 trades, $100 risk each:
- 4 wins × $200 = +$800
- 6 losses × $100 = -$600
- Net: +$200 profit ✓
✗ 1:1 R:R with 40% Win Rate
10 trades, $100 risk each:
- 4 wins × $100 = +$400
- 6 losses × $100 = -$600
- Net: -$200 loss ✗
Practical Example
You identify a bullish EUR/USD setup. Entry: 1.1000, stop loss below support at 1.0970 (30 pips risk). Resistance is at 1.1090 (90 pips reward). This gives you a 3:1 R:R ratio. Even if you only win 35% of these trades, you'll be profitable long-term because your winners (3× bigger) compensate for your losers.
Related Terms
Learn More About Forex Trading
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