What is the risk-reward ratio in trading?

The risk-reward ratio compares what a trade loses at its stop with what it stands to gain at its target. A 25-pip stop with a 50-pip target is written 1:2, or as one number, target distance divided by stop distance: 2.0, or 2R. A trade like that has to win one time in three, 33.3%, just to break even before costs. This page uses the single number.

The risk-reward ratio formula and breakeven win rate

With W the distance to the target and L the distance to the stop loss:

• Ratio: R = W ÷ L
• Breakeven win rate: L ÷ (W + L), which is the same as 1 ÷ (1 + R)
• Expected result per trade, in units of risk: p × R − (1 − p), where p is the share of trades that win

Costs move the breakeven

Spread and commission are paid on winners and losers alike. They come off every win and add to every loss, so the real ratio is lower than the one on the chart.

The risk-reward calculator shows both figures, before and after costs, from your entry, stop and target.

The ratio on its own says little

With the same stop, a far target is reached less often than a near one. A 3R trade that wins 20% of the time loses money (0.2 × 3 − 0.8 = −0.2R per trade), while a 1R trade that wins 55% of the time does not (0.55 − 0.45 = +0.1R). The ratio and the share of winning trades only mean something together. Both examples are hypothetical.

The other common mistake is taking the planned ratio for the realised one. Moving the stop to breakeven, trailing it or closing part of a position all change what a trade actually returns relative to its risk, and so does slippage on the stop.

Where you see it in MT5

The New Order window (F9) has no ratio field: you set the ratio yourself through the Stop Loss and Take Profit levels. For the realised figure, open View → Reports: the Risks section lists Avg. Profit and Avg. Loss, the average actual result of winning and losing positions (MT5 help). Divided, they give your realised payoff ratio in money.

Risk-reward in automated trading

Every trade PipWarden opens gets an ATR-based stop loss and a take profit at a fixed reward-to-risk ratio, both held at the broker. Breakeven and the trailing stop (on by default) and partial close (off by default) change the realised ratio, and the dashboard statistics show your account’s own results rather than the plan; see how it works. Over a long run of trades, the ratio and the share of winners, together with the risk per trade, are the inputs of the risk of ruin. More on the first half of any trade plan in how to calculate lot size, and on why the numbers above matter in why forex traders lose money.