What Is Risk/Reward? Calculation, Minimum Criteria and the Link to Win Rate

Risk/reward compares the potential gain from a trade with the loss you are willing to risk. Calculations and examples explain why it deserves attention before win rate alone.

What is risk/reward?

Risk:Reward, or R:R, compares the amount you can lose with the amount you aim to earn. In notations such as 1:2 and 1:3, risk comes first and reward second. Risking KRW 100,000 to target KRW 300,000 gives 1:3.

Define it before entry by choosing the stop and target, then comparing their distances from entry. Without this step, it is easy to let losses grow while cutting profits prematurely.

How to calculate it

The calculation uses price distances or corresponding money amounts.

Reward-to-risk multiple = (target − entry) ÷ (entry − stop) for the long example.

Base stops and targets on evidence such as support and resistance, rather than arbitrary numbers. Trade size should also follow capital-management principles limiting each trade's loss to a defined proportion of capital.

Why a low win rate can still be profitable

Beginners often focus only on how frequently they win. With sufficiently large payoffs, however, a win rate below 50% can produce long-run profit. The key is expectancy, combining win rate and average outcomes.

Expectancy = win rate × average win − loss rate × average loss.

With risk fixed at 1 per trade, the following table gives the win rate needed for zero expectancy.

At 1:3, three wins out of ten are already enough to cover losses, and four or more are profitable in this simplified example. At 1:1, 50% breaks even and more is needed for profit. Lower payoffs require higher win rates; higher payoffs can tolerate lower win rates.

What minimum ratio do traders use?

There is no universal answer, but many traders use at least 1:2 as a screening criterion. Below 1:1.5, fees and slippage can make an advantage harder to maintain. In futures with leverage, costs and liquidation risks make this assessment particularly important.

• A higher ratio is not automatically better. An unrealistically distant target increases the displayed ratio while reducing its probability of being reached. Examine payoff and win rate together.
• Past statistics do not guarantee future results. Expectancy is an average over sufficient observations; consecutive short-term losses remain possible.
• Records are essential. Track actual payoffs and win rate in a trading journal to estimate your own expectancy.

Risk/reward is fundamental to trading survival. No strategy guarantees future profit, and losses remain possible. Define the ratio before entry and trade only within affordable risk.