Educational content. This article defines the risk-reward ratio and shows how it interacts with win rate and trading costs. It does not constitute investment advice or a recommendation. CFD trading carries significant risk of loss and may not be suitable for all investors.
The risk-reward ratio compares what a trade risks with what it aims to gain: the distance from the entry price to the stop-loss against the distance from the entry price to the target. A stop 10 pips away and a target 20 pips away give a ratio of 2 to 1. A ratio of 2 to 1 needs the trade to win 33.3% of the time to break even, and a ratio of 1 to 1 needs 50%.
This article gives the calculation, the break-even win rate for common ratios, the expectancy formula that combines ratio and win rate, and a table showing how the spread changes both. The figures are arithmetic, not forecasts.
What Is the Risk-Reward Ratio?
The ratio is stated as reward to risk, measured in price distance from the entry:
Risk-reward ratio = (target - entry) / (entry - stop), for a long position.
An example on EURUSD, with illustrative levels: a buy at 1.13495, a stop-loss at 1.13395 (10 pips below) and a take-profit at 1.13695 (20 pips above). Risk is 10 pips, reward is 20 pips, so the ratio is 2 to 1. On a 1 lot position, 10 pips is worth USD 100, so the trade risks USD 100 to target USD 200. Lot size scales the amounts but leaves the ratio unchanged; how lot size is chosen is covered in what is a lot.
The ratio needs two levels, and both are set in the order. The stop and the target are placed as pending orders attached to the position, using the order logic described in buy limit vs buy stop.
Break-Even Win Rate for Each Ratio
A trade series breaks even when the wins pay for the losses. With a ratio R, one win pays R units and one loss costs 1 unit, so the break-even win rate is 1 / (1 + R):
| Reward to risk | Break-even win rate |
|---|---|
| 0.5 to 1 | 66.7% |
| 1 to 1 | 50.0% |
| 1.5 to 1 | 40.0% |
| 2 to 1 | 33.3% |
| 3 to 1 | 25.0% |
| 4 to 1 | 20.0% |
The table shows why neither number can be judged alone. A strategy that wins 70% of the time with a 0.5 to 1 ratio is only just above break-even (66.7%), while a strategy that wins 35% of the time with a 2 to 1 ratio is comfortably above it (33.3%). A high win rate with a small target and a low win rate with a large target can carry identical results.
Expectancy: Combining Ratio and Win Rate
Expectancy is the average result per trade, measured in units of the amount risked:
Expectancy = (win rate x ratio) - (loss rate x 1)
With a win rate of 40% and a ratio of 2 to 1: (0.40 x 2) - (0.60 x 1) = 0.20. The trade series has an average gain of 0.2 units per trade before costs, which is USD 20 on a USD 100 risk. With a win rate of 30% and the same ratio, the result is (0.30 x 2) - (0.70 x 1) = -0.10, a loss of 0.1 units per trade.
Expectancy is a description of past results or of an assumption, not a promise. The win rate in the formula has to be measured from a large sample of trades, and it changes with the market and with the strategy. Assuming a win rate because it makes a plan look profitable is the usual error.
Spread Drag: The Real Ratio Is Worse Than the Plan
The plan's ratio uses the prices on the chart. The trade uses the bid and the ask. A long position opens at the ask and closes at the bid, so the spread is paid on entry: the stop is effectively further away by the spread, and the target is effectively closer by the same amount.
The table uses a 2 to 1 plan and an illustrative spread of 1 pip on EURUSD. It is not a quoted spread: spreads vary by account type, session and news.
| Stop | Target | Real risk | Real reward | Real ratio | Break-even win rate |
|---|---|---|---|---|---|
| 5 pips | 10 pips | 6 pips | 9 pips | 1.50 | 40.0% |
| 10 pips | 20 pips | 11 pips | 19 pips | 1.73 | 36.7% |
| 20 pips | 40 pips | 21 pips | 39 pips | 1.86 | 35.0% |
| 50 pips | 100 pips | 51 pips | 99 pips | 1.94 | 34.0% |
The cost of the spread is a fixed number of pips, so it hurts more on a tight stop. On a 5-pip stop, the same 2 to 1 plan needs a 40% win rate, against 34% on a 50-pip stop. Commission, where applicable, adds to this in the same way.
The same effect applies on other instruments. At the 29 September 2026 snapshot, XAUUSD had a spread of 0.27 (bid 4,158.47, ask 4,158.74). A stop of 3.00 and a target of 6.00 have a real risk of 3.27 and a real reward of 5.73, a real ratio of 1.75 and a break-even win rate of 36.3%. Slippage on a stop-loss order fill lowers it further.
Why a Higher Ratio Is Not Free
A target far from the entry is reached less often than a target close to it, so a higher ratio usually comes with a lower win rate. Widening the target from 20 pips to 40 pips while keeping the stop at 10 pips raises the ratio from 2 to 1 to 4 to 1 and lowers the break-even win rate from 33.3% to 20%, but the trade now needs the price to travel four times the stop distance before reversing. Whether the win rate falls by more than the break-even rate does is an empirical question for the specific strategy, not something the ratio answers.
The reverse also holds. A tight target increases the win rate and needs the win rate to stay high to compensate for the small reward: at 0.5 to 1, one loss cancels two wins.
How the Two Levels Are Usually Set
The ratio is an output of where the stop and the target are placed, not an input to choose first. The stop is commonly placed at a level that would invalidate the trade idea, such as beyond a recent swing point. The target is commonly placed at the next level where the price has reacted before. The ratio is then the result of those two levels, and a trade whose ratio is too low to work at the strategy's win rate is skipped rather than adjusted. Moving the stop closer to improve the ratio, without a reason in the price structure, only raises the chance that normal movement triggers it. A stop that trails the price rather than staying fixed changes the ratio during the trade; see what is a trailing stop.
Frequently Asked Questions
What is a good risk-reward ratio?
There is no universal figure, because the ratio only means something together with the win rate. A ratio of 2 to 1 needs a win rate above 33.3% to break even before costs, and a ratio of 1 to 1 needs above 50%.
What win rate do I need for a 1 to 2 risk-reward ratio?
If "1 to 2" means risking 1 to gain 2, the break-even win rate is 33.3% before costs. With a 1-pip spread on a 10-pip stop it is about 36.7%.
Does the risk-reward ratio include the spread?
Not in the simple formula. The spread widens the real risk and reduces the real reward, so the real ratio is lower than the planned one, and the effect is larger on tight stops.
Is risk-reward the same as expectancy?
No. The ratio describes one trade plan. Expectancy combines the ratio with the win rate and gives the average result per trade over many trades.
Does a high risk-reward ratio guarantee profit?
No. A high ratio only lowers the break-even win rate. The trade series is profitable only if the actual win rate stays above it after costs.
Calculate the Numbers for Your Own Position
The Vanto trading calculator shows the pip value and margin for any instrument and lot size, which is what converts a stop distance into an amount at risk.
Risk warning. Trading securities, futures, options, and contracts for differences are complex financial instruments that require knowledge and understanding. Prices can fluctuate significantly and securities may become valueless. Investors may incur losses exceeding the potential for profits. Trading on margin can result in losses greater than the amount initially deposited. Past performance is not necessarily a guide to future performance. The information in this article is for educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any financial instrument. Consider whether CFD trading is appropriate for your circumstances and seek independent advice if necessary.