Every time you set a stop and a target, you’ve written a contract with the market: risk this much to make that much. The risk-reward ratio is that contract in a single number — and it silently decides how often you’re allowed to be wrong.
What a 1:2 (or 2R) trade means
Risk-reward compares the money you’d lose if your stop hits to the money you’d make if your target hits. A 1:2 trade risks one unit to make two. Because traders measure risk in R (one R = the amount at stake to your stop), the same trade is often written as 2R — the target is two times your risk away.
- 1:1 (1R) — target and stop are equidistant from entry
- 1:2 (2R) — target is twice as far as the stop
- 1:3 (3R) — target is three times as far
The ratio says nothing about how likely the trade is to work. It only describes the shape of the payoff. A 3R trade that fills its target is great; a 3R trade that never gets close is just a nice-sounding plan. Keeping the two ideas separate — payoff shape vs probability — is where most of the confusion lives.
Calculating R:R from entry, stop and target
The math is pure distance:
Reward:Risk = (target − entry) ÷ (entry − stop) for a long.
Worked example, going long:
- Entry: 1.2000
- Stop: 1.1950 → risk = 50 pips
- Target: 1.2100 → reward = 100 pips
- R:R = 100 ÷ 50 = 2:1, a 2R trade
For a short, just flip the direction: risk is stop − entry, reward is entry − target. The units cancel, so it works identically on pips, ticks, points, or cents. The risk-reward calculator does this from your three prices and hands you the R-multiple, and the position size calculator turns that stop distance into an actual size that keeps your R fixed in dollars. Sizing and R:R are two halves of the same decision — set them together, before entry, never after.
The breakeven win rate for each ratio
Here’s the part that reframes how you pick trades. Every risk-reward ratio has a breakeven win rate — the exact hit rate you need just to end up flat, before costs. Win more than that and you’re profitable; win less and you bleed, no matter how good the setup felt.
The formula is clean:
Breakeven win rate = 1 ÷ (1 + reward:risk)
| Reward:Risk | Breakeven win rate | What it means |
|---|---|---|
| 1:1 (1R) | 50% | Must win more than half |
| 1:1.5 (1.5R) | 40% | Room to be wrong 60% |
| 1:2 (2R) | ~33% | Win one in three to break even |
| 1:3 (3R) | 25% | Win one in four to break even |
| 1:5 (5R) | ~17% | Six losers per winner is survivable |
Read that table twice. At 3R, you can lose three trades out of four and still not be down. That single fact is why so many profitable traders sit on win rates that would look “bad” to an outsider.
Why a great R:R with a low win rate still works
A 30% win rate sounds like a broken strategy — until you attach it to a big enough payoff. Trend and breakout traders live here: they take many small −1R losses and wait for the occasional +4R or +6R runner to pay for all of them.
- Losses are capped at −1R by the stop — small, frequent, expected.
- Winners are open-ended — a few large-R trades carry the whole account.
- The discipline is emotional, not mathematical: you must keep pulling the trigger through a string of losers, because the edge only shows up across the full sample.
This is also why funded traders drawn to patient, wide-target styles gravitate toward firms whose rules tolerate longer holds and slower equity curves — always worth confirming a firm’s specific limits, like those documented for The5ers, before you assume your R:R style fits their program. The ratio you trade has to survive the account’s rules, not just the market.
Where R:R gets dangerous is the inverse: a high win rate paired with a worse-than-1R payoff — winning 80% but risking 3R to make 1R. One bad loss erases a week of wins. A pretty win rate is a trap when the payoff shape is upside down.
R:R is a plan, not a guarantee: slippage and spread
The ratio you calculate at entry is the theoretical one. Reality shaves it down.
- Spread widens your effective entry and can push the exit further than the chart shows.
- Slippage on the stop — especially around news — can turn a planned −1R into −1.3R or worse.
- Commissions eat a fixed bite out of every trade, which hurts small-R scalps far more than wide-R swings.
So a “clean” 2R on the chart might be a 1.7R once costs land. That doesn’t kill the concept — it just means you should plan for a little worse than the screen shows, and never trade a razor-thin ratio where costs eat the whole edge. Shibiki’s auto-journal records the R-multiple you actually realized on each closed trade, not the one you drew, so the gap between planned and real R:R stops being invisible — and its live edge health reads those realized numbers through a Wilson confidence interval, so you find out whether your true win rate is clearing the breakeven line or quietly sitting under it.
Related: R-multiple · Risk-reward calculator · Position size calculator