What risk-to-reward means
Risk-to-reward is the ratio between the money you'll lose if your stop is hit and the money you'll make if your target is reached. If you risk £100 to make £200, the ratio is 1:2. If you risk £100 to make £100, it's 1:1. If you risk £100 for a potential £50, it's 2:1 against you.
You calculate it once per trade — before you enter — based on your entry, your stop and your target. It shouldn't change while the trade is running.
Why it matters
It matters because it changes the arithmetic of everything else you do. A trader with a modest win rate can still make money if the winners are large enough. A trader with a high win rate can still lose money if the winners are too small. Risk-to-reward is the lever that decides which of those you are.
Trade expectancy
Expectancy is the average amount you can expect to make (or lose) per trade over a large sample. It combines two things: how often you win, and how much you make when you do versus how much you lose when you don't. A positive expectancy means the strategy makes money over time. A negative one means it loses, no matter how good it feels in the short run.
You don't need to calculate expectancy formally. You do need to understand that both win rate and reward ratio matter — and that improving either one improves your expectancy.
Win rate versus reward ratio
Beginners obsess over win rate. Being right feels good. But win rate on its own tells you almost nothing about whether a strategy makes money.
A quick sanity check. At 1:2 risk-to-reward, you only need to be right about 34% of the time to break even before costs. At 1:3, roughly 26%. At 1:1, you need to be right well over 50%. Which of these is easier to achieve consistently — a 26% win rate at 1:3, or a 55%+ win rate at 1:1? For most traders, the answer is the higher ratio.
Neither approach is 'better' in the abstract. What matters is that your win rate and your reward ratio, combined, produce a positive expectancy across a real sample of trades.
Choosing sensible targets
The target isn't a wish. It's a level the market is realistically likely to reach given the current context — a prior high, a level of structure, a well-defined range boundary. If the nearest meaningful target is only 1:1 away, that's the reality of the trade, not a reason to move the target further out.
Placing a target at 1:5 just because that would look nice on paper is a fantasy. The market doesn't owe you the move. Better to accept 1:1, size accordingly, or skip the trade.
Avoiding unrealistic expectations
It's tempting to believe that 1:3 or 1:5 setups are 'just out there waiting to be found'. They exist, but they're not the norm. Most valid setups on most days offer somewhere between 1:1 and 1:2. That's a perfectly workable environment for a disciplined trader with a decent win rate.
The traders who blow up chasing enormous risk-reward ratios do so because they refuse to take reasonable trades and then, out of frustration, take terrible ones.
A practical example
You spot a setup on GBP/USD. Entry at 1.2700, structure suggests a stop just below 1.2680 (20 pips risk), and the nearest resistance sits at 1.2740 (40 pips reward). That's a 1:2 trade. You take it at 1% risk. If it works, you make 2%. If it fails, you lose 1%. Ten trades like that, at a genuinely valid setup and a realistic 50% win rate, produce a net 5% gain — with the risk fully contained on every trade.
That's the whole game. Not one heroic trade — repeated, disciplined base hits.
Key takeaways
- Risk-to-reward is what you can lose vs what you can realistically make on a trade
- Expectancy = win rate × average win, minus loss rate × average loss
- A modest win rate at 1:2 can outperform a high win rate at 1:1
- Targets should be based on market structure, not on wishful thinking
- Most valid setups produce 1:1 to 1:2 — that's more than enough over time