What Is the Risk-Reward Ratio in Trading? Definition, Formula, and Examples

Definition:
The Risk-Reward Ratio (RRR) compares the potential loss of a trade (risk) with its potential profit (reward). It helps traders evaluate whether a trade setup is worth taking.

Explanation:
For every trade, you define:

• Risk = distance from entry to Stop Loss (SL)
• Reward = distance from entry to Take Profit (TP)

The Risk-Reward Ratio shows how much you stand to gain compared to how much you are willing to lose.

• A ratio of 1:2 means risking $1 to potentially earn $2.
• A ratio of 1:3 means risking $1 to earn $3.

Traders aim for higher reward relative to risk, while also maintaining a good win rate.

🧮 Plain-Text Formula (Web-Safe)

Risk-Reward Ratio = Potential Profit ÷ Potential Loss

📈 Example (Forex)

• Entry: EUR/USD at 1.1000
• Stop Loss: 1.0950 → Risk = 50 pips
• Take Profit: 1.1100 → Reward = 100 pips

Risk-Reward Ratio = 100 ÷ 50 = 2.0 → (1:2)

This means the trader risks 50 pips for a potential gain of 100 pips.

🌍 Why Risk-Reward Ratio Matters

• Ensures trades are mathematically favorable
• Helps filter out low-quality setups
• Works best when combined with strong risk management and position sizing
• Crucial for long-term profitability

Related Terms: Stop Loss, Take Profit, Position Size, Win Rate, Risk Management

Category:
Trading / Risk & Position Management

✅ FastPip Tip:

Don’t chase only high risk-reward setups—balance is key. A 1:2 ratio with a good win rate can be more profitable than aiming for 1:5 and losing often.

📣 Related Resources from FastPip

✅ Use Copy Trading Platform to follow traders with proven risk-reward discipline
✅ Get Forex Signals with clear SL/TP levels and ratios
✅ Read our Blog for strategies on optimizing your risk-reward