Definition
What is Risk-reward ratio?
The risk-reward ratio compares the distance to the stop loss with the distance to the take profit; 1:2 means risking $1 to make $2.
Risk-reward on its own says little; it only makes sense together with the win rate. The break-even win rate is 1 ÷ (1 + reward/risk): 50% at 1:1, about 33% at 1:2 and 25% at 1:3.
Higher ratios need fewer winners but usually hit their target less often. The right ratio is the one your strategy can actually reach with a stable win rate.
Costs such as spread and commission reduce the real ratio, especially on short-term trades with small stops.
Example
Example: on a $10,000 account you risk $50 per trade at 1:2. Over 10 trades with 4 winners and 6 losers, the result is 4 × $100 − 6 × $50 = +$100, a positive month despite losing more often than winning.
At a prop firm
On a prop firm challenge, a modest risk per trade with a ratio of 1:1.5 to 1:2 reaches a 10% target in a reasonable number of trades while keeping the daily loss limit far away.
Frequently asked questions
What is a good risk-reward ratio?
Many traders aim for 1:1.5 to 1:3, depending on the strategy and its win rate.
Is a high ratio always better?
No. A 1:5 target that is rarely reached can perform worse than a 1:1.5 target reached often.