Risk-Reward Ratio Explained: Why 1:2 Beats 1:1

The risk-reward ratio compares how much you’re risking on a trade to how much you stand to gain if it works out — and it’s one of the most important numbers in a trading plan.

How it’s calculated

If your stop loss is 20 pips away and your take profit is 40 pips away, you’re risking 20 to potentially make 40 — a risk-reward ratio of 1:2. The further the reward is from the risk, the more favorable the ratio.

Why it matters more than win rate alone

A trader who wins only 40% of trades can still be profitable overall with a 1:2 ratio, because the winners are worth more than the losers. Conversely, a trader who wins 60% of trades with a 1:1 ratio can still lose money if a few large losses aren’t controlled.

Finding realistic targets

A favorable ratio only helps if the target is realistic given the market’s actual behavior — setting an unrealistically far take profit just to improve the ratio on paper usually means it rarely gets hit.

Combining it with a stop loss and position size

Risk-reward works together with your stop loss placement and position size (see our 1% rule guide) to define exactly how much of your account is on the line for exactly how much potential gain.

Key takeaway

Aiming for trades where the potential reward is meaningfully larger than the risk gives you room to be wrong some of the time and still come out ahead over many trades.