The risk-to-reward ratio compares how much a trader is risking on a position to how much they stand to gain if the trade works out as planned.
How it's calculated
It is typically expressed as the distance between entry and stop-loss (risk) relative to the distance between entry and target (reward). A 1:2 risk-to-reward ratio means the potential gain is twice the potential loss.
Why it matters more than win rate alone
A strategy can be profitable with a win rate below 50% if the average winning trade is meaningfully larger than the average losing trade — and unprofitable with a win rate above 50% if the reverse is true. Risk-to-reward and win rate need to be considered together, not separately.
Setting realistic targets
Reward targets should be grounded in actual market structure — such as a realistic resistance level — rather than an arbitrary multiple chosen simply to satisfy a desired ratio.
