Risk-Reward Ratio: Why Winning Less Can Earn More
Risk warning: Good risk-reward does not guarantee profit. This is education, not financial advice.
Risk-reward compares what you risk to what you aim to make.
- 1:1 — risk $0.10 to make $0.10
- 1:2 — risk $0.10 to make $0.20
- 1:3 — risk $0.10 to make $0.30
Why it matters
You do not need to win often if your winners are bigger than your losers.
Example with 1:2:
- Win 4, lose 6 out of 10 trades.
- 4 wins × $0.20 = $0.80
- 6 losses × $0.10 = $0.60
- Net +$0.20 — you won less than half, but you still gained.
With 1:1, the same 4 wins / 6 losses would lose money.
How to use it
- Place a stop loss first (your risk). See Stop Loss: Your Automatic Brake Pedal.
- Place a take profit about 2× further (your reward).
- Keep lot size matched to the 1% rule in Position Sizing.
Do not move your take profit closer when in profit. Let the plan work.
Practise this on your trading plan in The Trading Plan: Your Written Set of Rules and Your First Trade walkthrough.
Bottom line: Risk $0.10 to aim for $0.20 (1:2) and keep your stop firm, or you risk winning often yet losing money. Related guides: Starting Forex as a Beginner.