The risk to reward ratio compares what you stand to lose on a trade with what you aim to make. Measure the distance from entry to stop-loss and from entry to take-profit: risk 20 pips to target 40 pips and the ratio is 1:2. With your win rate, it shows whether a strategy can pay its way.
In short
- Risk to reward ratio = (entry to stop-loss distance) : (entry to take-profit distance), written as 1:R. A 20-pip stop with a 40-pip target is 1:2.
- The break-even win rate before costs is 1 ÷ (1 + R): 50% at 1:1, 33.3% at 1:2 and 25% at 1:3.
- Expectancy, the average result per trade, is (win rate × R) minus (loss rate × 1). Win rate and ratio only mean something together.
- Higher ratios usually come with lower win rates and longer losing streaks. At a 30% win rate, a run of six straight losses somewhere in 100 trades has a 99% probability.
- On a $10,000 Direct account at 1% risk per trade, the 6% maximum loss is six full losses from the starting balance.
How do you calculate the risk to reward ratio?
To calculate the risk to reward ratio, measure the distance from your entry to your stop-loss (the risk) and from your entry to your take-profit (the reward), then divide both by the risk. A long EUR/USD trade at 1.0850 with a stop at 1.0830 and a target at 1.0890 risks 20 pips to make 40: a ratio of 1:2.
The risk reward ratio formula changes direction for a short trade:
- Long: risk = entry minus stop-loss; reward = take-profit minus entry.
- Short: risk = stop-loss minus entry; reward = entry minus take-profit.
A short share CFD at $150 with a stop at $154 and a target at $138 risks $4 to make $12, so the ratio is 1:3.
Some traders quote the reward to risk ratio instead, as a single number: 1:2 risk to reward is a reward-to-risk of 2. Both describe the same trade. Because the ratio compares price distances, it is the same at any position size. Your position size turns it into dollars: with $100 at risk, a 1:2 trade aims to make $200.
What are R multiples?
An R multiple expresses a trade's result in units of what you risked. 1R is the amount you lose if your stop is hit. Risk $100 and make $250 and the trade is +2.5R; get stopped out and it is -1R. Measuring in R lets you compare trades of different sizes, on different markets, in one list.
R multiples also expose the gap between plan and outcome. A trade planned at 1:3 that you close early at +1.2R goes into your records as +1.2R. Costs pull every result down a little, so a full stop-out with costs might be -1.08R. Logging the realised R of every trade in a trading journal gives you your real average win and loss, which is what the maths below needs.
What win rate do you need at each risk to reward ratio?
Your break-even win rate is 1 ÷ (1 + R), where R is the reward per unit of risk. At 1:1 you need to win 50% of trades to break even, at 1:2 you need 33.3%, and at 1:3 you need 25%, all before trading costs. Costs push every figure up, and they hit low ratios hardest.
To include costs, express them in R. If costs average c per trade, a winner nets R minus c and a loser costs 1 plus c, so the break-even win rate becomes (1 + c) ÷ (1 + R). The right-hand column uses c = 0.1R, which is what 1 pip of costs does to a 10-pip stop.
| Risk to reward ratio | Break-even win rate before costs | Break-even with costs of 0.1R per trade |
|---|---|---|
| 1:0.5 | 66.7% | 73.3% |
| 1:1 | 50.0% | 55.0% |
| 1:1.3 | 43.5% | 47.8% |
| 1:1.5 | 40.0% | 44.0% |
| 1:2 | 33.3% | 36.7% |
| 1:3 | 25.0% | 27.5% |
| 1:4 | 20.0% | 22.0% |
A 1:3 risk reward ratio needs only one winner in four to break even before costs. Whether a strategy can hold that win rate is a separate question, and the next two sections deal with it.
How does expectancy combine win rate and risk-reward?
Expectancy is the average result per trade in R: (win rate × average win) minus (loss rate × average loss). A strategy that wins 40% of the time at 1:2 has an expectancy of (0.4 × 2) minus (0.6 × 1) = +0.2R. If that win rate holds, it averages a fifth of its risk per trade before costs.
Very different strategies can share the same expectancy:
- 60% winners at 1:1: (0.6 × 1) minus (0.4 × 1) = +0.2R.
- 40% winners at 1:2: (0.4 × 2) minus (0.6 × 1) = +0.2R.
- 30% winners at 1:3: (0.3 × 3) minus (0.7 × 1) = +0.2R.
A small change in win rate moves expectancy a long way. If the 1:2 strategy wins 35% instead of 40%, expectancy falls to (0.35 × 2) minus (0.65 × 1) = +0.05R, a quarter of what it was.
Why can the risk-reward ratio alone mislead you?
A ratio describes one trade's plan. It says nothing about how often price reaches the target, and wider targets are reached less often. Two traders can both use 1:3 and get opposite results, because win rate, costs and the way each one manages open trades decide expectancy.
Three things usually separate the planned ratio from the real one.
The target moves the win rate. On the same setup, a 40-pip target is hit more often than a 120-pip target, so raising the ratio from 1:1 to 1:3 on paper usually lowers the win rate. Only your own records tell you by how much.
Trade management changes realised R. Plan 1:3, close half the position at +1R and move the stop to entry. If price then returns to entry, the trade earns +0.5R. If it reaches the target, the trade earns 0.5 + 1.5 = +2R. That strategy never makes +3R, so judge it on its realised numbers.
Lower win rates bring longer losing streaks. In 100 trades, the probability of at least one run of six straight losses is about 21% at a 60% win rate, 87% at 40% and 99% at 30%. For a run of eight, it is about 4%, 49% and 86%. All three strategies above have the same +0.2R expectancy, yet the 1:3 version will almost certainly hit a long streak.
How the risk to reward ratio works on CMC Funded Classic and Direct
On CMC Funded, convert every rule into R. With 0.5% risk per trade on a $10,000 account, 1R is $50: the Classic Phase 1 target of $800 is 16R, the $500 daily loss limit is 10R and the $1,000 maximum loss is 20R. On Direct, the $1,000 target is 20R but the $600 maximum loss is only 12R.
| Rule on a $10,000 account | Dollars | In R at 0.5% risk ($50) | In R at 1% risk ($100) |
|---|---|---|---|
| Classic Phase 1 target (8%) | $800 | 16R | 8R |
| Classic Phase 2 target (5%) | $500 | 10R | 5R |
| Classic daily loss limit (5%, first day) | $500 | 10R | 5R |
| Classic maximum loss (10%) | $1,000 | 20R | 10R |
| Direct target (10%) | $1,000 | 20R | 10R |
| Direct daily loss limit (4%, first day) | $400 | 8R | 4R |
| Direct maximum loss (6%) | $600 | 12R | 6R |
The R figures are the same on the $25K, $50K and $100K accounts, because every rule is a percentage: the targets and the maximum loss of the starting balance, the daily loss limit of each day's starting equity. Only the dollar value of 1R changes.
Worked example on a $25,000 Classic account
- You risk 0.5% per trade: 0.005 × $25,000 = $125, so 1R is $125.
- You buy EUR/USD at 1.0850 with a stop at 1.0825 (25 pips) and a target at 1.0900 (50 pips). The ratio is 1:2.
- Size: $125 ÷ 25 pips = $5 per pip. At $10 per pip per standard lot, that is 0.50 lots.
- A win pays 50 × $5 = $250, which is +2R. A loss costs $125, which is -1R, plus costs.
- The Phase 1 target is 8% of $25,000 = $2,000, or 16R. The daily loss limit is $1,250 (10R) and the maximum loss floor is $22,500, which is $2,500 or 20R below the start.
- With a 40% win rate at 1:2, expectancy is +0.2R, so 16R takes about 80 trades on average (16 ÷ 0.2), if the win rate holds.
Choosing your risk per trade on Direct
On a $10,000 Direct account at 1% risk, the target is 10R and the maximum loss is 6R, so six straight losses from the starting balance end the account. A run of six somewhere in 100 trades is about 87% likely at a 40% win rate and 99% at a 30% win rate. The floor is fixed, so a run that starts after you have built a cushion can be survived, but every account starts with no cushion.
At 0.5% risk, the target becomes 20R and the maximum loss 12R. The probability of twelve straight losses in 100 trades falls to about 8% at a 40% win rate. You need roughly twice as many trades to reach the target, and with no time limit on either route, taking longer has no penalty beyond time and the extra trading costs. Halving risk also doubles your room under the daily loss limit: at 0.5% risk, Direct's $400 is eight full losses in one day, so a personal stop of two or three losses keeps you well clear. The position sizing lesson shows how to pick a percentage that fits both limits.
Common mistakes
- Picking the target to hit a ratio. A target placed at 3R because 1:3 looks good, with no chart level behind it, mostly lowers your win rate. Find the level first, then decide whether the ratio is worth taking.
- Widening the stop during a trade. Moving a 20-pip stop to 40 pips doubles the risk, and a 40-pip target that was 1:2 becomes 1:1. Its break-even win rate jumps from 33.3% to 50%.
- Ignoring costs on tight stops. At 1:1 with 0.1R of costs you need 55% winners to break even. Short-term styles feel this most, as our comparison of swing trading vs day trading shows.
- Judging a strategy on one number. A 70% win rate with 1:0.3 trades loses money, because (0.7 × 0.3) minus (0.3 × 1) is -0.09R. Work out expectancy from both numbers.
- Quoting planned R instead of realised R. Your journal's average win and loss are the inputs, whatever you planned at entry.
- Raising risk to make up for a low win rate. Longer losing streaks at high ratios call for a smaller risk per trade.
Questions traders ask
What is a good risk to reward ratio?
A good ratio is one your strategy can pair with a win rate above break-even after costs. 1:2 is a common starting point because it lets you lose more often than you win, while some short-term strategies work at 1:1 with a high win rate. Compare your journal's realised win rate with the table above.
Is a risk-reward ratio of 1.3 good?
A ratio of 1:1.3 needs a win rate above 43.5% to break even before costs, or 47.8% with costs of 0.1R per trade. That works for a strategy that wins around half its trades and is too thin for one that wins 40%. Your tested win rate decides whether 1.3 is good for you.
Is 3% risk per trade good?
On a prop challenge, 3% leaves very little room. On a $10,000 Direct account it is $300 per trade: two losses ($600) reach the 6% maximum loss, and a second loss in one day passes the $400 daily limit. On Classic, two losses in a day ($600) also pass the $500 daily limit.
How do you turn a risk to reward ratio into a lot size?
The ratio does not set your size; the stop distance and your dollar risk do. Divide the dollar risk by the stop in pips, then by the value of one pip per lot. Risking $100 with a 25-pip stop on EUR/USD gives $4 per pip, which is 0.40 lots at $10 per pip per lot.
Next steps
Work through the risk-reward and expectancy lesson with your own journal numbers, then use the position size calculator to turn each planned ratio into a lot size. The full Classic and Direct targets and limits are on the rules page.
You can compare both routes and every account size on the challenges page.