Two traders take the same setup on the same chart. One puts the target at the distance of the stop, the other puts it twice as far away. They will report completely different win rates at the end of the quarter and could easily finish with identical equity. The ratio between what you risk and what you aim for is a dial, and turning it changes every other number in the strategy.
The formula is one line. Break-even win rate equals one divided by one plus the reward multiple. Risking one to make one needs half your trades to work. Risking one to make three needs a quarter. Risking one to make half needs two thirds, which is why the trader who takes quick profits and holds losers is doing arithmetic they never checked.
| Risk to reward | Break-even win rate before costs | What that feels like over 100 trades |
|---|---|---|
| 1 : 0.5 | 66.7% | Needs to be right two times out of three, permanently |
| 1 : 1 | 50.0% | A coin flip with no margin for a bad month |
| 1 : 2 | 33.3% | Two thirds of trades lose and the account still grows |
| 1 : 3 | 25.0% | Three losses per win is a normal week, not a problem |
| 1 : 4 | 20.0% | Long stretches of red, occasionally interrupted |
Costs move every row of that table
The break-even figures above assume trading is free. It is not. The spread is paid on entry, commission is charged on both sides at many brokers, and on positions held overnight there is a financing adjustment. A trade planned as one to two, where the stop is twenty pips and the spread plus commission comes to two pips of equivalent cost, is really risking twenty-two to make thirty-eight. The break-even win rate climbs accordingly.
The effect is brutal at short stop distances and negligible at long ones. A swing trader risking two hundred pips barely notices a one pip spread. A scalper risking six pips is handing over a sixth of the risk before the trade starts, which is why the payoff arithmetic for scalping strategies only works with tight execution costs and a genuinely high hit rate. Anyone comparing two brokers should run their own typical stop distance through this calculation rather than reading the spread table in isolation.
Higher is not automatically better
The obvious conclusion from the table is to set targets very far away and accept a low win rate. That breaks in practice, because the hit rate is not independent of the target. Every extra unit of distance is more time in the market, more chance of a reversal, more chance of a session change or a data release interrupting the move. Push the target far enough and the fall in hit rate outruns the rise in payoff.
Where that crossover sits is a measurement, not an opinion. Log the maximum favourable excursion on every trade, which is the furthest the position ever moved in your favour before it resolved, and plot the distribution. If your setups typically run 1.8 units of risk before stalling, a three unit target is not ambitious, it is a target that the market rarely reaches and that quietly converts winners into scratches. That is the sort of question a properly kept journal answers in an afternoon.
A ratio is a plan, not a result. Trading is high risk and no combination of stop and target creates an edge on its own. Payoff arithmetic tells you what hit rate a strategy must clear, and only measured trades tell you whether it clears it.
Planned R and realised R are different numbers
Here is the leak that shows up in almost every retail journal. The plan says one to two. The statement says the average winner was 1.1 units and the average loser was 1.0. Losses are taken in full, because the stop does that job automatically, while winners get closed early because holding a profitable position through a pullback is uncomfortable. The result is a strategy that was designed at 1:2 being traded at roughly 1:1, with a win rate that was only ever good enough for the original design.
Track both columns. Planned R at the moment of entry, realised R at the close. If the gap is large and consistent, the fix is behavioural rather than analytical, and our notes on the psychology side cover the pattern. A partial exit rule can help, taking part of the position at one unit and letting the rest run to target, at the cost of a lower average payoff on the trades that do go all the way.
What actually decides your money: expectancy
Ratio and hit rate only matter together. Expectancy per trade is the win rate multiplied by the average win, minus the loss rate multiplied by the average loss, expressed in R so the sizes are comparable. A strategy winning 40% at 1:2 has an expectancy of 0.2R per trade before costs. A strategy winning 70% at 1:0.5 has an expectancy of 0.05R. The second one feels far better to trade and pays a quarter as much per opportunity.
Expectancy also has to be read alongside frequency. Half an R per trade across four trades a month is a slower business than a tenth of an R across a hundred, and both are hostage to the size of the drawdown they produce along the way. The interaction between payoff, streak length and drawdown depth is the reason two strategies with identical expectancy can be entirely different experiences to sit through.
Choosing the ratio for the setup, not for the rulebook
A fixed house rule of never below 1:2 sounds disciplined and often is not. It leads traders to place targets at levels the market has no reason to reach, or to shrink stops until they sit inside the noise, which is the same error described in our piece on risk management rules. The stop belongs where the idea is wrong. The target belongs where the move plausibly runs out, at a prior high, a session boundary, a level of prior supply.
Then check the ratio those two honest levels produce. If it is 1:1.3 and your measured hit rate on that setup clears the required rate with margin, the trade is fine. If it is 1:1.3 and your hit rate does not, the trade is not worth taking, and passing is the whole decision. The ratio is a filter applied after the levels are drawn, rather than a shape you force the chart into.
"Show me the average winner and the average loser in R and I can tell you more about a trader's year than any equity curve screenshot."
— Alex Onta, Executive Director, SINGUARD
Key Takeaways
- Break-even win rate is one divided by one plus the reward multiple, so 1:2 needs a third of trades to work and 1:3 needs a quarter.
- Spread and commission raise every required win rate, and the damage is proportional to how tight your stop distance is.
- Stretching the target lowers the hit rate, so the workable ratio is found by measuring how far your setups actually run.
- Log planned R and realised R separately, because cutting winners early turns a 1:2 design into a 1:1 result.
Frequently Asked Questions
What win rate do I need at 1:2 risk to reward?
Before costs, a payoff of two units of reward per unit of risk breaks even at a win rate of one third, because the formula is one divided by one plus the reward multiple. Spread, commission and any slippage push the required rate above that, and the gap widens the tighter your stop distance is relative to the cost of trading.
Is a higher risk-reward ratio always better?
No. Raising the target lowers the hit rate, because price has to travel further before something interrupts it. Beyond a certain distance the fall in hit rate outpaces the gain in payoff and expectancy declines. The workable ratio for a strategy is an empirical question answered by measuring how far your setups actually run, not a preference.
Why is my realised R lower than my planned R?
Because closing early is asymmetric. Full losers are taken at the stop while winners are often cut before the target out of discomfort, so the plan says two units of reward and the statement says considerably less. Logging planned and realised R as separate columns makes the size of that leak visible within a few dozen trades.