Risk/reward formula
R:R = (take profit − entry) ÷ (entry − stop loss). A trade that risks 20 pips to make 40 has a 1:2 ratio.
Break-even win rate = 1 ÷ (1 + R). At 1:2 you need to win 33.3% of trades to break even; at 1:1, 50%.
| R:R | Break-even win rate |
|---|---|
| 1:0.5 | 66.7% |
| 1:1 | 50.0% |
| 1:1.5 | 40.0% |
| 1:2 | 33.3% |
| 1:3 | 25.0% |
Expectancy: the number that decides if a strategy works
Expectancy = win rate × reward − loss rate × risk, measured in R. A strategy that wins 45% of the time at 1:2 earns 0.45 × 2 − 0.55 = +0.35R per trade on average. Risking 0.5% per trade, 20 trades make roughly +3.5%.
A high ratio alone is not enough: wider targets are hit less often. Test your real win rate on a free trial before paying for a challenge.