A risk-reward ratio compares how much you stand to lose on a trade against how much you stand to gain, calculated before entering. Risking $100 to make $300 gives a 1:3 ratio. Determining how often a strategy needs to be right to break even is what the arithmetic does, and it gets routinely quoted without that second half.
How it is calculated
Take distance to your stop, against distance to your target.
Buy at $100 with a stop-loss at $90 and a take-profit at $130, and you risk $10 to make $30. That is 1:3.
The ratio is a plan, not an outcome. Describing what you intended when opening the position, it holds only if both levels behave as expected, which slippage and gaps regularly prevent.
The half that gets left out
Without a win rate, a ratio means nothing. Most explanations skip that point.
| Risk-reward ratio | Win rate needed to break even |
|---|---|
| 1:1 | 50% |
| 1:2 | 33.3% |
| 1:3 | 25% |
| 1:5 | 16.7% |
| 2:1 | 66.7% |
| 3:1 | 75% |
Read the bottom two rows carefully. Risking $300 to make $100 requires being right 75% of the time simply to avoid losing money, before fees.
And read the top rows with equal care. Sounding excellent, a 1:5 ratio requires being right only 16.7% of the time, which also means being wrong more than four times in five is the expected experience. Regardless of the arithmetic, most people cannot sit through that sequence.
The trap in wide targets
Here the ratio gets gamed, usually unintentionally, by anyone who sets a target first and works backwards to a stop that makes the arithmetic look acceptable. Backwards. Every time.
Moving the target further away or the stop closer improves any ratio on paper. Neither change makes the trade better. Placed inside an asset's normal range of movement, a stop triggers on noise, and a target far outside plausible movement never gets reached.
Levels that mean something have to come first. Support and resistance zones, the asset's typical volatility, and the point at which the reason for the trade would be proven wrong. Set the levels, then calculate the ratio. Reversing that order produces a flattering number attached to a trade that was never realistic.
Expectancy, which is the real number
Combining ratio and win rate gives expectancy, the average result per trade across a long sequence. It is the number that decides whether an approach works.
Multiply your win rate by average win, then subtract loss rate multiplied by average loss.
A strategy winning 40% of the time at 1:2 produces: (0.40 × 2) minus (0.60 × 1), which equals 0.2. Positive expectancy, meaning it makes 0.2 units per unit risked on average across many trades.
Two things get exposed. About any individual trade, positive expectancy says nothing, only about a long sequence. And fees, spreads, and slippage all come out of that 0.2, enough to turn a marginally positive strategy negative.
What the ratio does not account for
- Execution reality. Stops fill below their level in fast markets. Targets get missed by a few cents and reverse.
- Fees and spread. Round-trip costs come out of every result, and on thin markets they exceed the ratio's precision entirely.
- Position size. A 1:3 ratio on a position sized too large is still ruinous. The ratio and the sizing are separate decisions.
- Correlation. Ten trades at 1:3 across ten correlated altcoins is closer to one trade than ten.
- Whether the win rate estimate is real. Most are derived from small samples or from memory, both of which flatter.
How the ratio gets used
Descriptively, since what suits any individual depends on their strategy and temperament.
As a filter rather than a target is how traders generally use it, declining trades where plausible upside does not justify the distance to a sensible stop. Others size positions with it, risking a fixed percentage of capital per trade regardless of setup.
Treating a favourable ratio as a reason to take a trade with no other merit is the common failure. Good arithmetic on a bad idea remains a bad idea.
What ratio suits you depends on your win rate, your time horizon, and how many consecutive losses you can sit through without abandoning the approach. No page can answer that.
Where mb.io fits
Any planned ratio depends on execution matching the plan, which is a property of the venue.
mb.io is a regulated crypto spot exchange backed by MultiBank Group, a financial institution founded in 2005 that serves more than 2 million clients across 100+ countries.
- Regulated by VARA in the UAE and AUSTRAC in Australia
- 40-nanosecond execution speed
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Open your account and start trading on mb.io.
Frequently asked questions
How do I calculate a risk-reward ratio?
Divide the distance to your stop by the distance to your target. Buying at $100 with a stop at $90 and a target at $130 risks $10 to make $30, which is 1:3.
What is a good risk-reward ratio?
There is no universal answer, because the ratio only means something alongside a win rate. A 1:3 ratio needs a 25% win rate to break even. A 3:1 ratio needs 75%.
Does a higher ratio mean a better trade?
No. Any ratio can be improved by moving the target further or the stop closer, and neither change makes the trade more likely to work. The levels have to come from market structure first.
What win rate do I need at 1:2?
33.3% to break even, before fees. Below that the strategy loses money regardless of how good the individual setups look.
What is expectancy?
Win rate multiplied by average win, minus loss rate multiplied by average loss. It gives the average result per trade across a long sequence, and it is the number that actually determines whether an approach works.
Why do traders lose money with good ratios?
Because ratios ignore win rate, position size, fees, slippage, and correlation between positions. A favourable ratio on an oversized position in ten correlated assets is not the protection it appears to be.
Should I always use a fixed ratio?
That depends on your strategy and what you can psychologically sustain. A 1:5 approach means being wrong more than four times in five, which many people abandon before the arithmetic has a chance to work.
Does the ratio guarantee my loss is capped?
No. It assumes your stop fills at your level, which fast markets and thin books regularly prevent. The planned risk and the realised risk are different numbers.
