Risk & Money Management
Beginner
Risk-Reward Ratio (R:R)
Also called: R:R, RR, reward-to-risk
The ratio of potential profit to potential loss on a trade — e.g. 2:1 means risking $1 to make $2.
Definition
Risk-reward ratio compares the distance from entry to stop-loss (risk) against the distance from entry to take-profit (reward). A 2:1 R:R lets you be profitable at a 40% win rate; a 1:1 needs 50%+; a 0.5:1 needs 67%+.
R:R is the lever that decouples expectancy from win rate. Many profitable systems run < 50% win rates but high R:R.
Example
Buy at 1.0800, SL 1.0780 (20-pip risk), TP 1.0850 (50-pip target). R:R = 50/20 = 2.5:1.
Formula
R:R = (TP price − Entry) / (Entry − SL price) (for long positions, distance not direction)
Why it matters
A great R:R on paper means nothing if your stop is too tight to give the trade room. Anchor stops to structure first, then compute R:R; never the other way around.