Risk-Reward Ratio

The risk-reward ratio compares the amount you stand to lose on a trade (your risk) to the amount you could gain (your reward). A 1:2 risk-reward ratio means you're risking $1 to potentially make $2. A 1:3 ratio means risking $1 for $3 of potential profit.

Why this matters: with a 1:2 risk-reward ratio, you only need to win 34% of the time to break even. With a 1:3 ratio, the break-even win rate drops to 25%. This means you can be wrong on most of your trades and still make money — as long as your risk management is solid and you let winners run.

Calculating your risk-reward is straightforward: divide the distance from your entry to your take-profit by the distance from your entry to your stop-loss. If you enter EUR/USD at 1.0850, set a stop at 1.0820 (30 pips risk) and a target at 1.0910 (60 pips reward), that's a 1:2 ratio. Most professionals aim for at least 1:1.5, and many won't take a trade below 1:2.