What is risk to reward ratio?

What is risk to reward ratio?

Risk to reward ratio compares how much you stand to lose on a trade if it fails, against how much you stand to gain if it succeeds. It's one of the simplest concepts in trading, and one of the most consistently ignored by beginners.

The basic calculation

Risk to reward ratio = Distance to stop loss : Distance to take profit

In the diagram above, the entry sits 25 points above the stop loss and 75 points below the take profit. That's a risk to reward ratio of 1:3 — for every dollar risked, the trade is targeting $3 in potential reward.

Why this changes everything about your win rate requirements

This is the part most beginners miss: your risk to reward ratio determines what win rate you actually need to be profitable.

With a 1:1 risk to reward ratio, you need to win more than 50% of your trades just to break even (before costs). With a 1:3 risk to reward ratio, you only need to win more than 25% of your trades to be profitable.

This is genuinely liberating once it clicks — you do not need to be right most of the time to make money trading, if your winners are meaningfully larger than your losers.

A simple table to internalize

• 1:1 ratio → breakeven win rate needed: 50%
• 1:2 ratio → breakeven win rate needed: ~33%
• 1:3 ratio → breakeven win rate needed: 25%
• 1:4 ratio → breakeven win rate needed: 20%

Why you shouldn't chase ratio blindly either

It's tempting to think "I'll just always aim for 1:5 trades." But an unrealistic take profit target that price rarely reaches just means you'll get stopped out far more often without ever hitting your target. The take profit still has to be placed at a logical level — the next resistance zone, a previous high, a liquidity pool — not an arbitrary distance picked just to make the ratio look good on paper.

How this connects to grading your own trades

This is also why a losing trade can still be a well-executed trade. If you took a trade with a 1:3 ratio, properly sized your position, and it simply didn't work out — that's a good trade with a bad outcome, not a mistake. Outcome and execution quality are two different things, which is exactly the distinction Tradecility's AI grading is built around.

• Risk to reward ratio compares your stop loss distance to your take profit distance
• A better ratio lowers the win rate you need to be profitable — 1:3 only requires 25% wins to break even
• Take profit targets should still be placed at logical levels, not stretched just to improve the ratio on paper
• A losing trade with a good risk to reward setup and proper execution is still a well-executed trade