Beginner’s Guide to Risk-Reward Ratio: Effective Trading Strategies
By Jamaica De Peralta | Published on November 18, 2025
You are likely in search of a risk-reward ratio calculator and came across this article to help you assess your trading setups and effectively navigate the world of trading using this trading strategy.
The risk-reward ratio is a disciplinary approach to risk management. While calculators are useful tools, applying trading psychology correctly requires a foundational understanding of key concepts first. You need to understand how to determine appropriate entry points, stop losses, and profit targets manually before relying solely on automation.
This TRU Insight will introduce the fundamental concept of the risk-reward ratio in trading. We will provide a clear explanation of the formula and discuss how various ratios (e.g., 1:2, 1:3) fit into different expert-advised trading strategies.
What is the risk-reward ratio?
From the term itself, ‘ratio’, a proportionate system of balancing the right ways of risk and reward. It’s like a scale system of weighing the two sides of the good and bad. Technically, the risk-reward ratio (R/R) is a metric that measures the difference between a trader’s entry and stop orders (risks) against the entry and take profit (reward).
This simple principle provides a solid foundation for structuring your trading plans effectively. That is why it is important to use the risk reward ratio because you have a critical forward thinking of expected losses and gains, ensuring you are not losing a lot to gain very little.
How Does Risk Reward Ratio Work?
The typical standard for the risk-reward ratio in the trading industry is often cited as 1:2. This benchmark means that for every $1 risked, the trader aims to make $2 in profit. However, our internal TRU Insight experts highlight that 1:2 is just one potential strategy among many; it is not a universally ideal ratio for all trading styles.
For a truly scalable strategy, the appropriate ratio must be determined in conjunction with your specific win rate to ensure sustainable, long-term profitability.
To put this into a mathematical perspective, here are the break-even points for different risk-reward formulas:
1:1 ratio: Needs a win rate of at least 50% to break even.
1:3 ratio: Only needs a win rate of 25% to cover their losses.
This logical framework should be applied depending on the trading strategy and win expectation you can align with, helping you determine which risk-reward ratio will work effectively for you.
How to calculate a risk-reward ratio?
The risk-reward ratio formula is divided by the potential profit (reward) by the possible loss (risk). If you put in a formula: Risk-Reward Ratio Potential Profit/ Potential Loss.
Here is a more detailed step-by-step approach to effectively calculating your desired risk-reward ratio:
Step 1: How to identify the price points
To calculate the risk-reward ratio correctly, you first need to identify three price levels on your trading chart. These levels allow you to measure the potential loss, which is the risk, and the potential profit, which is the reward, for your trade setup.
Entry Price: Use the horizontal line tool on your trading platform and place it at the exact price where you plan to enter the trade.
Stop-Loss Level: Place a second horizontal line at the price where you will exit the trade if it moves against you. This level defines the maximum loss you are willing to accept. Take-
Profit Target: Place a third horizontal line at the price where you plan to close the trade to secure your profits. These three levels form the foundation of your risk and reward calculation.
Step 2: How to calculate the risk
The main fundamental aspects to calculate the potential loss are keeping these two distinctive positions metrics, that is, logically vice versa:
Long position entry price- stop loss price
Short position entry price- stop loss price
Step 3: How to calculate the reward
Similar to calculating risk, the reward formula also reflects an inverse relationship between the metrics.
Long position take profit target-entry price
Short position take profit target- entry price
Step 4: Apply the Formula
Use the numbers you calculated from the respective risk and reward results. You can now divide the potential profit (risk) by the possible loss (reward).
Risk Reward Ratio Strategy and Tips
As reported by traders in our trading community and single-handedly tested by our experts, understanding the R/R ratio reveals a fundamental balancing act in trading. The R/R ratio is not established based purely on a simple formula.
As a responsible retail trader, you must also measure your personal capabilities and chosen strategies to align with the correct risk-reward approach. The following tips help integrate this metric practically.
Know the Psychological Impact
Your wins and losses in trading can influence your decisions and throw off your planned R/R ratio. When you are facing the real charts, you can be tempted to cut your profits by exiting immediately or experiencing larger losses by holding your trades a little longer.
The professional method is different; when you commit to the risk-reward ratio, you must be comfortable with the mathematical reality of your chosen win rate and ratio, regardless of the emotional decisions that can ruin your trading strategy.
Related Article: How Important Is Risk Management in Trading?
Conduct Backtesting
The purpose of backtesting, when it comes to the risk-reward ratio, is learning from historical data to discover the average win rate that works for your specific strategy. This way, you learn from data-driven evidence and have the proper idea of which risk ratios are statistically likely to work for you. It is like having a robust trading journal that will be beneficial for you to reflect on your past trading activities objectively.
Use Trading Indicators
One of the main advantages of using a risk-reward ratio is not just randomly selecting your three price points, but layering your trading strategies with technical indicators like moving averages or support/resistance lines.
These visual tools align with a logical market structure, giving you confidence that you are moving in the right direction for a more precise R/R calculation.
Sync with Your Trading Style
As much as possible, your risk-reward in trading should work in harmony with your trading style. It’s like syncing your R/R calculation with your market approach, availability, and trading frequency for a better win rate expectation.
For example, a scalper who makes many quick trades per day will use a very different R/R ratio (often near 1:1) than a swing trader who holds positions for weeks (frequently using 1:3 or higher).
Read more: Effective Online Trading: Different Types of Trading Strategies and Styles
Conclusion: Risk-Reward is Everything in Trading
Understanding the concept of the risk-reward ratio can feel like a whole ecosystem of trying to decode quantum physics when tossing probabilities for profitability. However, you do not have to do it the Einstein or perhaps the common ratio standard way, because at the end of the day, the trading strategy that works should be in harmony with your trading style.
A well-structured risk-reward ratio can favor potential rewards when supported by a solid understanding of trading setups, but remember, risk is always part of the equation
Risk-reward is everything in trading, and trading means learning. Skipping the steep curve of learning is not a shortcut to success. Learn freely from reputable trading communities and reputable educational sources that offer solid education. Continue your learning journey at CommuniTrade.
Frequently Asked Questions
What is the best risk-reward ratio?
The commotion of searching for the “best” risk-to-reward ratio is not a recommended basis to rely on. A safer approach to this depends on your strategy and win rate.
What is the highest risk-reward ratio?
There’s no fixed upper limit, but ratios like 1:3 or higher are considered aggressive and can significantly boost profitability if applied consistently. However, higher ratios often reduce trade frequency and require precise setups, making them harder to achieve in volatile markets.
Does market volatility affect the ideal risk-to-reward ratio?
Yes, volatility matters a lot. When markets move a lot, you often need wider stop losses to manage normal price swings. This changes your R/R calculation, so you must adjust your approach to the current market environment.
Is a 1:1 risk-reward ratio enough for beginners?
A 1:1 ratio is a reasonable starting point if you win more than half of your trades. However, many successful traders suggest aiming for a higher ratio, like 1:2, to give yourself more room for error and reduce the pressure of needing a perfect win rate.
