Risk-Reward Ratio: Formula and Break-Even Win Rate
The risk-reward ratio explained: how to calculate it, the win rate you need to break even at each ratio, how fees change it, and how to use it in tournaments.
The risk-reward ratio compares what a trade can lose with what it can gain. It is the simplest way to know, before entering, whether a trade is worth taking — and it decides how often you need to be right.
The formula
Risk-reward = (entry − stop) ÷ (target − entry) for a long — the distance to the stop over the distance to the target.
Traders usually say it the other way round, as reward-to-risk: a stop 1% away and a target 2% away is 1:2 risk-reward, or 2R reward.
The win rate you need
Ignoring costs, the break-even win rate is:
Break-even win rate = 1 ÷ (1 + reward/risk)
| Reward : risk | Break-even win rate |
|---|---|
| 0.5 : 1 | 66.7% |
| 1 : 1 | 50% |
| 1.5 : 1 | 40% |
| 2 : 1 | 33.3% |
| 3 : 1 | 25% |
A trader who wins only 40% of trades can be profitable at 2:1. A trader who wins 60% can lose money at 0.5:1.
Fees move the line
Fees are paid on every entry and exit, so a small target is hit harder than a large one. Example on a 100,000 position: two taker fills at 0.05% cost 100. On a trade risking 500 for 500, a win nets +400 and a loss costs −600 after fees: the 1:1 trade becomes about 0.67:1, and the break-even win rate rises from 50% to 60%. Use limit orders where you can: see market vs limit orders. Funding on perpetuals also counts for positions held through funding times — see funding rate explained.
Expectancy: putting it together
Expectancy per trade = (win rate × average win) − (loss rate × average loss)
Example: 45% wins averaging 2R, 55% losses averaging 1R → 0.45 × 2 − 0.55 × 1 = +0.35R per trade.
Using risk-reward in a tournament
- Plan targets you can actually reach within the tournament's time. A 3:1 target in an Hourly may never be touched.
- Don't widen stops to improve the ratio on paper — a wider stop means a smaller position for the same risk.
- Remember the bell: open positions are counted at the end as if closed at the mark price, including the exit fee.
- Liquidation is the worst outcome — a liquidated trader ranks last. Size by risk; see position sizing.
FAQ
What is a good risk-reward ratio? One that fits your win rate after costs. Many traders aim for at least 1.5:1 to 2:1.
Is a higher ratio always better? No. Far targets are hit less often. The ratio and the win rate must be judged together.
Should every trade have the same ratio? Not necessarily, but every trade should have a defined stop and target before entry.
PnL World tournaments are simulated: trades are executed against live market data, but no real-money positions are opened on any exchange. Nothing here is financial advice.
Next: Stop-loss and take-profit · Position sizing · Trading consistency