"You need a good Risk:Reward" — a phrase repeated by every trading guru. But what does it really mean? Why is an RR of 2 important? And why does win rate alone mean nothing without RR? This is the guide that clears it all up, with real calculations and tables.
What Risk:Reward (RR) is
Risk:Reward is the ratio between how much you're willing to lose and how much you want to gain on a single trade.
Formula: RR = potential profit / potential loss
Example: you go long EURUSD at 1.0850. You set the stop loss at 1.0820 (you'd lose 30 pips). You set the take profit at 1.0910 (you'd gain 60 pips).
RR = 60/30 = 2 (or "1:2", read "one to two").
Why RR matters more than win rate
Imagine two traders:
- Trader A: 70% win rate, RR 0.5 (loses 100, gains 50)
- Trader B: 40% win rate, RR 3 (loses 100, gains 300)
Who's profitable? Let's calculate the expectancy (expected profit per trade) over 100 trades:
Trader A: (70 × 50) − (30 × 100) = 3500 − 3000 = +€500 over 100 trades
Trader B: (40 × 300) − (60 × 100) = 12000 − 6000 = +€6000 over 100 trades
Trader B makes 12 times as much, even while being wrong 60% of the time. This is the power of RR.
The table that saves your career
Combinations of win rate and RR. Green = profitable, red = losing:
- WR 30% + RR 3 → positive expectancy (green)
- WR 40% + RR 2 → positive expectancy
- WR 50% + RR 1 → zero expectancy (break-even)
- WR 50% + RR 1.5 → positive expectancy
- WR 60% + RR 1 → positive expectancy
- WR 70% + RR 0.5 → positive expectancy (but fragile)
- WR 30% + RR 2 → negative expectancy
- WR 40% + RR 1 → negative expectancy
- WR 50% + RR 0.8 → negative expectancy
Practical rule: your win rate × (RR + 1) must be > 1. If it's 1.0 = break-even. Above = profitable. Below = losing.
What RR to aim for
It depends on your style:
Scalping (M1-M5)
Typical RR 1 to 1.5. Trades last minutes, small targets, slippage and spread weigh in. Required win rate: 55%+.
Day trading (M15-H1)
Typical RR 1.5 to 2.5. Balance between frequency and quality. Required win rate: 40-50%.
Swing trading (H4-D1)
Typical RR 3 to 5. Rarer trades but with wide runners. Required win rate: 30-40%.
Position trading (W1+)
Typical RR 5 to 10. Few trades but big ones. Win rate can be 25-30%.
Note: the higher the target RR, the lower the win rate. It's normal: fewer trades win, but when they do they pay a lot.
How to set RR correctly
1. Stop loss = technical reason
The SL must be where your thesis is invalidated, not where "you feel comfortable" or "lose $100." Examples of logical SLs:
- Below the most recent swing low (for longs)
- Below a bullish order block
- Below a clear support level
- 1.5× ATR below entry (volatility-based)
2. Take profit = realistic level
TP must be where price can realistically reach within the trade timeframe. Not "I want +100 pips" if the market is ranging. Examples:
- Next significant swing high/low
- Liquidity above/below the range
- Previous daily/weekly highs
- Fibonacci 1.618 of the last impulse
3. RR = TP distance / SL distance
After setting SL and TP based on technical logic, you calculate the RR. If it's < 1.5, skip the trade. Don't force the TP to "make RR 2" — you invalidate the logic.
Common mistakes with RR
Mistake 1: moving the SL "it'll come back"
You opened with a 30-pip SL, after 25 pips against you move it to 50. You've destroyed your planned RR + violated your statistical edge.
Mistake 2: closing in profit "that's enough"
You had TP at +60 pips (RR 2), you close at +30 pips "to be safe." You've turned an RR 2 into RR 1. Over 100 trades you lose half the potential profit.
Mistake 3: forced RR
You see a reaction zone, you have 10 pips to a strong level (SL), to make RR 3 you put TP at +30 pips... but it's inside another reaction zone. It'll be rejected. Unrealistic TP = trade closed early.
Mistake 4: ignoring spread/commissions
On +5 pip scalping, if you have 2 pips of spread + 1 pip of commission, your effective "RR 1" is 0.5. Always include costs in RR calculations.
Advanced trade management
Partials
"1R partial + runner" strategy:
- Entry with target RR 3
- At +1R you close 50% of the position → secure break-even
- You move SL to entry (BE) → the rest of the position is a "free trade"
- You let it run until TP at 3R
Result: if TP is hit, you make 1R+1.5R = 2.5R with half the risk. If SL on BE, neutral. Reduces variance.
Trailing stop
You move SL behind price via ATR or swing. Reduces potential profit but captures extended moves. Good for trend-following.
How much RR you need to be profitable (concrete numbers)
With typical trading costs (spread + commission = ~0.5R per trade) and realistic win rate for your style:
- Scalper: WR 60% + RR 1.5 = profitable after costs
- Day trader: WR 45% + RR 2 = profitable after costs
- Swing trader: WR 35% + RR 3.5 = profitable after costs
Below these numbers, you statistically lose in the long term. Always including costs in the calculation is non-negotiable.
In summary
- RR = how much you want to gain / how much you're willing to lose
- RR + win rate together determine expectancy (not one without the other)
- Rule: WR × (RR + 1) > 1 → profitable
- Target RR varies by style: scalping 1.5, day 2-2.5, swing 3-5, position 5+
- SL = technical reason (not emotional), TP = realistic level
- Include spread + commissions in calculations
- Partials + trailing = advanced trade management to optimize realized RR
RR is one of the three pillars of profitable trading (along with win rate and position sizing). Without a structured RR, even the best strategy loses in the long term.