Risk/Reward Ratio in Forex Explained
A risk/reward ratio tells you how much you stand to gain versus lose on a trade — and, combined with your win rate, whether a strategy is mathematically viable.
ratio = reward pips ÷ risk pips. The win rate needed to break even = 1 ÷ (1 + ratio) × 100 — a 1:2 ratio needs only a 33% win rate to break even long-run.
Why the ratio alone isn't the full picture
A 1:3 risk/reward ratio sounds great, but if your actual win rate is only 15%, the strategy still loses money over time. The ratio only tells you the win rate required to break even — you need your own historical win rate to know if a strategy is actually profitable.
Worked example
Entry 1.1000, stop-loss 1.0950 (50 pips risk), take-profit 1.1100 (100 pips reward): ratio = 100 ÷ 50 = 1:2. Break-even win rate = 1 ÷ (1+2) × 100 = 33.3% — win just 1 in 3 trades at this ratio and you break even; more than that, and you're profitable.
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Frequently Asked Questions
What's a 'good' risk/reward ratio?↓
There's no universal answer — it depends entirely on your strategy's actual win rate. A high ratio with a very low win rate can still lose money; a low ratio with a high win rate can still be profitable.
Should I always aim for a ratio above 1:1?↓
Not necessarily — scalping and mean-reversion strategies often run below 1:1 ratios with high win rates. The ratio is a tool for evaluating a strategy, not a rule to force onto every trade.