The risk-reward ratio compares the potential loss of a trade to its potential profit. It is calculated by dividing the distance to the stop loss by the distance to the take profit. A 1:2 ratio means you risk $1 to potentially make $2. A favorable risk-reward ratio allows a strategy to be profitable even with a win rate below 50%.
You buy EUR/USD at 1.1050 with a stop loss at 1.1020 (30 pips risk) and a take profit at 1.1110 (60 pips reward). Your risk-reward ratio is 1:2. Even if you win only 40% of your trades with this ratio, you remain profitable over time.
Ready to trade?
A-Book execution, 100+ instruments, and 24/5 multilingual support.