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This tool is for education and planning only and is not financial advice. Forex and CFD trading carries a high risk of losing money rapidly due to leverage. Check your broker's own contract specifications, fees and margin rules before you trade.
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Risk and reward
From our lesson "Stop Loss and Take Profit" (Forex basics, part 10). This part starts at 1:07 of the 2:22 video and plays in a large player.
What the risk-reward ratio tells you
The risk-reward ratio compares what a trade stands to lose if the stop-loss is hit with what it stands to gain if the take-profit is reached. A trade risking 20 pips to make 60 has a ratio of 1:3: it earns three units of risk (3R) when it works and loses one (1R) when it does not.
On its own, the ratio says nothing about whether a trade is good. A 1:5 target that is rarely reached can lose money, and a 1:1 trade that wins 60% of the time makes money. The ratio becomes useful when you combine it with your realistic win rate, which is exactly what the break-even figure in the calculator does.
Break-even win rate for each ratio
The minimum share of trades you must win to break even before costs, from the formula 1 ÷ (1 + R).
| Risk-reward | Break-even win rate | Profit per 10 trades at a 50% win rate |
|---|---|---|
| 1:0.5 | 66.7% | −2.5R |
| 1:1 | 50.0% | 0R |
| 1:1.5 | 40.0% | +2.5R |
| 1:2 | 33.3% | +5R |
| 1:3 | 25.0% | +10R |
| 1:4 | 20.0% | +15R |
Expectancy per trade = (win rate × average win) − (loss rate × average loss). A positive number, after costs, is what makes a strategy worth trading.
How to set a sensible stop and target
- Place the stop where the idea fails
Beyond a recent swing high or low, or outside the normal noise measured by the Average True Range. Never at a round number chosen for comfort.
- Find a realistic target
The next support or resistance level, a previous high or low, or a measured move. If the nearest level gives less than 1:1.5, consider skipping the trade.
- Size the position from the stop
Use the position size calculator so the stop costs a fixed share of your account, typically 0.5% to 2%.
- Check the costs
Add the spread to the stop distance and subtract it from the target. On short-term trades this can turn 1:2 into 1:1.6.
- Record the result in R
Logging results in multiples of risk shows if your average win and win rate really produce a positive expectancy.
Worked example: a EUR/USD trade
- The setup
Aisha plans to buy EUR/USD at 1.1650 with a stop at 1.1625 (25 pips) and a target at 1.1700 (50 pips).
- The ratio
50 ÷ 25 gives 1:2, so she needs to win more than 33.3% of such trades to break even.
- The money
At 0.2 lots, a pip is worth $2: the stop risks $50 and the target aims for $100.
- The cost check
A 1-pip spread makes it 26 pips of risk for 49 of reward, about 1:1.9. The trade still clears her rule of 1:1.5 or better.
The ratio was only half the decision. Aisha's journal shows she wins about 45% of these setups, which at 1:1.9 gives a positive expectancy of roughly 0.3R per trade.
Risk-reward mistakes to avoid
A 1:5 target that price rarely reaches lowers your win rate more than it raises your average win.
Widening a stop after entry changes the ratio you planned and the money at risk.
On scalps, spread and commission can consume a third of the reward.
Risk-reward works over dozens of trades. A single loss says nothing about the method.
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Risk-Reward Calculator FAQs
What is a good risk-reward ratio in forex?
Many traders use 1:2 as a minimum, which needs a win rate above 33% to break even before costs. The right ratio depends on your strategy's win rate; trend strategies often use 1:2 or more, while range strategies may work at 1:1 with a higher win rate.
How do I calculate the risk-reward ratio?
Divide the distance from entry to take-profit by the distance from entry to stop-loss. A 60-pip target and a 20-pip stop give 1:3.
What win rate do I need at 1:2?
33.3% to break even before costs, from 1 ÷ (1 + 2). Anything above that is profit, if your average win and loss match the plan.
Is a 1:1 risk-reward ratio bad?
Not necessarily. At 1:1 you need to win more than 50% of trades after costs. Some mean-reversion strategies manage that; most beginners do not.
Does the calculator work for gold and yen pairs?
Yes. Choose the instrument preset and the calculator uses the right pip size: 0.01 for yen pairs and a $0.01 price step for gold, where one standard lot is 100 ounces.
What does 'R' mean?
R is one unit of risk: the amount you lose if the stop is hit. Measuring wins and losses in R lets you compare trades of different sizes.
Sources: Investor.gov: stop, stop-limit and trailing stop orders, FCA PS19/18: restricting CFDs for retail clients.