Home › Guides › Risk

Risk-reward ratio explained, with the break-even table

At 1:2, being right about 1 trade in 3 is enough to break even, before costs. Here's the simple math behind that, and where real targets come from.

Beginner guide · 8-minute read · Updated 2026-10-21

What the ratio means

The risk-reward ratio compares what you risk on a trade with what you're aiming for.

• Risk = the distance from your entry to your stop loss.
• Reward = the distance from your entry to your target (your take profit).

If you risk $1 a share to aim for $2 a share, that's 1:2, often called "2-to-1." For every unit you risk, you're aiming for two.

Work it out in three steps

1. Risk: entry minus stop. Buy at $40.00 with a stop at $39.00 → $1.00.
2. Reward: target minus entry. Target at $42.50 → $2.50.
3. Divide: $2.50 ÷ $1.00 = 2.5. That's a 1:2.5 trade.

For a sell (a short), flip it: the stop is above the entry and the target below. The math is the same. Our risk-reward calculator does it for you on any trade.

Thinking in units of risk

It helps to stop thinking in dollars and think in units of risk. One unit is whatever you risk on a trade.

• A full loss at your stop = −1 unit.
• Hitting a 1:2 target = +2 units.
• Getting out early at the halfway point = +1 unit.

This keeps trades fair to compare, whether the account is $500 or $50,000. It's also how a trading journal should record results.

The break-even table

Here's the useful part. The bigger your reward compared to your risk, the fewer trades you need to win just to break even.

The formula is simple: break-even win rate = 1 ÷ (1 + reward). At 1:2, that's 1 ÷ 3 = 33.3%.

Note: the table ignores costs. Spreads, commissions and slippage nudge the real break-even a little higher.

Bigger isn't automatically better

A 1:10 target sounds great. But if price almost never gets that far, you'll rarely win, and the ratio is just a wish.

What matters is the two things together:

• how often trades like this reach the target, and
• how big the win is when they do.

That combination is called expectancy. You can test yours with the expectancy calculator, using numbers from your own practice trades.

Targets come from the chart, not from the ratio

This is where many traders go wrong. They decide "I want 1:3," then put the target three times the stop distance away — even if there's a wall of sellers in between.

Do it the other way round:

1. Set the stop from the chart (just past the turning point your idea depends on).
2. Look for the next real place price may react: the last high it turned down from, a clear resistance zone, or a level from a bigger chart.
3. Put the target just before that place.
4. Now measure the ratio. If it's under 1:2, skip the trade.

Never improve the ratio by cheating the stop

You can make any trade look like 1:3 by squeezing the stop closer. Don't. A stop that's too tight gets hit by ordinary wiggles, and the "great ratio" was never real.

The stop goes where the chart says you're wrong. The target goes where the chart says price may stop. The ratio is just the honest result of those two.

Common mistakes

• Picking a ratio first, then forcing the chart to fit.
• Moving the target further away mid-trade because it "looks strong."
• Moving the stop further away to avoid a loss — that quietly turns 1:2 into 1:0.5.
• Judging a ratio without a win rate. Neither number means much alone.

Try it today

1. Open five charts. For each, pretend to buy at the current price.
2. Mark a stop just below the last low price turned up from.
3. Mark a target just before the last high it turned down from.
4. Work out the ratio. Count how many reach 1:2 or better.

You'll see quickly that good trades are rarer than they look — and that's useful to know before risking anything.

Questions