The ratio is a claim about your win rate
Risk/reward compares two distances: entry to stop, and entry to target. Both come from the chart, and neither is negotiable once the trade is on.
risk / reward = |target − entry| ÷ |entry − stop|
What makes the number useful is not the ratio itself but what it demands of you. Every ratio implies a minimum win rate:
break-even win rate = 1 ÷ (1 + R) × 100
| Ratio | Win rate needed to break even |
|---|---|
| 1 : 0.5 | 66.7% |
| 1 : 1 | 50% |
| 1 : 1.5 | 40% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25% |
| 1 : 5 | 16.7% |
Read that table as a set of promises you are making. Taking 1:3 setups is a statement that you can be wrong three times out of four and still finish flat. Taking 1:0.5 is a statement that you are right two thirds of the time. Both are testable, and most traders have never tested either.
Why "always use at least 1:3" is bad advice
It is repeated everywhere because it sounds prudent, and it survives because it is never checked against the second half of the equation.
Raising the target does not raise the probability of reaching it. A target twice as far away is, roughly, half as likely to be hit — so pushing a setup from 1:1.5 to 1:3 usually pushes the win rate down by about as much as the ratio went up, and the expectancy barely moves. What actually changes is the shape of the equity curve: fewer, larger wins and longer losing stretches, which is harder to sit through.
The ratio worth taking is the one where your real win rate beats the number in the table above. That is an empirical question about your own history, not a rule you can adopt from a video.
What the ratio does not include
Three costs sit outside the arithmetic and quietly move the break-even point:
- Spread and commission. On a scalp with a ten-pip stop, two pips of round-trip cost is 20% of the risk. The 1:2 you planned is closer to 1:1.6 by the time it settles.
- Where the stop actually fills. The ratio assumes the stop fills at its price. Gaps, news and thin books make the realised loss bigger than 1R, and a stop that regularly fills worse than placed is a broker problem disguised as a strategy problem.
- Whether you hold to target. A 1:3 that is closed at 1:1 in practice is a 1:1 strategy with extra waiting. This is the most common gap of the three and the only one you can see immediately — compare planned against realised on the R-multiple calculator.
Set the stop first, then the target, then the size
The order matters, because reversing it is how the ratio becomes fiction. If you decide the size first, the stop has to move to make the risk tolerable — and a stop placed to fit a position rather than to fit the chart is not a stop, it is a hope with a price on it.
The working sequence: the chart gives the stop, the stop and your risk percentage give the position size, and the target gives the ratio. Any other order lets the number you wanted decide the numbers you should have measured.