What Is the Risk-to-Reward Ratio? Win Rate, Expectancy and Profit Factor
What the risk-to-reward ratio means, how it connects to win rate, the break-even table every trader should know, and how to judge a strategy by expectancy instead of a single number.
The risk-to-reward ratio (often written R:R or RRR) compares how much you can lose on a trade with how much you aim to make. It is simple — and often misused.
The definition
Risk-to-reward = (entry − stop) : (target − entry)
A buy at 2,000 with a stop at 1,990 and a target at 2,020 risks 10 to make 20: a ratio of 1:2. In R terms the trade risks 1R and aims for +2R. (If R is new to you, start with how to calculate risk per trade.)
The ratio means nothing without the win rate
A 1:3 ratio sounds great, but if price reaches the target only 15% of the time, you lose money. What matters is the combination. The win rate at which a ratio exactly breaks even is:
Break-even win rate = 1 ÷ (1 + reward/risk)
| Risk : reward | Break-even win rate |
|---|---|
| 1 : 0.5 | 66.7% |
| 1 : 1 | 50% |
| 1 : 1.5 | 40% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25% |
Above that win rate the strategy makes money over time; below it, it loses — before costs such as spread and commission.
Expectancy: the number that actually decides
Expectancy = win rate × average win − loss rate × average loss (in R)
- 40% wins at +2R, 60% losses at −1R: 0.4 × 2 − 0.6 × 1 = +0.2R per trade
- 60% wins at +0.5R, 40% losses at −1R: 0.6 × 0.5 − 0.4 × 1 = −0.1R per trade
The second strategy wins more often and still loses money. That is why a high win rate on its own proves nothing.
Profit factor
A related measure is the profit factor: total profit of winning trades divided by total loss of losing trades. Above 1.0 the strategy made money in that period; 1.3–1.5 over a large sample is solid; very high values on a few trades usually mean the sample is too small.
Staged targets change the picture
Many trade plans have several targets (TP1, TP2, TP3, TP4). Part of the position is closed at each one, and the stop is often moved to breakeven after the first. The realised reward is then an average across the parts, and some trades end at breakeven (0R) instead of a full loss. That is why results should be judged in realised R, not by the furthest target on paper.
Common mistakes
- Moving the target further to "improve" the ratio. A target the market rarely reaches lowers the win rate by just as much.
- Moving the stop closer for the same reason. A stop inside normal noise gets hit more often.
- Ignoring costs. Spread and commission eat a bigger share of small-R trades.
- Judging on a handful of trades. Expectancy needs hundreds of results to be trustworthy.
How to check a signal provider
Ask for three numbers over a large sample: win rate, average win and loss in R, and profit factor — plus the worst drawdown. The NICS Trading Ecosystem track record publishes exactly these for every closed strong signal, with an equity curve and results per instrument. Weak "Watchlist" ideas are excluded from it entirely, so the numbers describe what is actually delivered.
View the track record