What Is the Risk-Reward Ratio? | What Are Forex Signals?

The risk-reward ratio compares the amount a trade could lose, the distance to its stop loss, with the amount it aims to make, the distance to its take profit. A trade that risks 40 pips to make 80 has a risk-reward ratio of 1:2.

How to calculate it

Risk-reward = (entry − stop) : (target − entry)

Signal	Risk	Reward	Ratio
Buy GBP/USD 1.2650, SL 1.2610, TP 1.2730	40 pips	80 pips	1:2
Buy EUR/USD 1.0850, SL 1.0820, TP 1.0910	30 pips	60 pips	1:2
Buy EUR/USD 1.0850, SL 1.0790, TP 1.0880	60 pips	30 pips	2:1 (risking more than the target)

Conventions vary. Some people write the reward first, and signal groups often advertise “1:3 setups” without saying which way round they mean. The safest habit is to state both numbers in pips or dollars, so there is no doubt about which side of the trade is larger.

The win rate each ratio needs

A ratio on its own says nothing about whether a strategy makes money. It sets the breakeven win rate, the share of trades that must win just to break even before costs:

Reward relative to risk	Breakeven win rate
0.5 (risk 2 to make 1)	66.7%
1 (risk 1 to make 1)	50%
2 (risk 1 to make 2)	33.3%
3 (risk 1 to make 3)	25%

The formula is: breakeven win rate = 1 ÷ (1 + reward-to-risk). Costs such as the spread push every one of these figures higher.

A tiny example

A signal service uses a 20-pip stop and a 40-pip target, a 1:2 ratio, and wins 40% of the time. Per trade, on average:

Wins: 0.40 × 40 pips = 16 pips
Losses: 0.60 × 20 pips = 12 pips
Expected result: +4 pips before costs

The same 40% win rate with a 1:1 ratio would lose 4 pips a trade on average. This average result per trade is called expectancy, covered in why win rate is misleading.

What the ratio leaves out

Probability. A 1:5 ratio looks attractive, but if the target is rarely reached it is worth little. The ratio says what is possible, not what is likely.
Slippage and gaps. The actual loss can exceed the planned risk if a stop fills worse than its level. See what is slippage.
Management after entry. Moving stops, partial exits and early closes change the real ratio from the one advertised.
Position size. A good ratio with an oversized position can still empty an account in a losing streak. See drawdown and risk of ruin.