New traders obsess over win rate, because being right feels like the point. It is not. A trader who wins three times out of ten can be comfortably profitable, and a trader who wins seven times out of ten can go broke. The risk reward ratio in forex is what decides which of those you are.
01 What the ratio measures
Your risk to reward ratio compares what a trade loses if you are wrong against what it makes if you are right. Risk 30 pips to make 90 and you have a ratio of 1 to 3, usually written 1:3. Risk 50 to make 50 and you are at 1:1.
The ratio matters because it changes how often you need to be right. Those two things trade off against each other, and once you see the relationship you stop chasing accuracy for its own sake.
At 1:3, you can be wrong three times out of four and still finish level. That is the whole argument for caring about the ratio. It buys you permission to be wrong often, which is useful, because you will be.
02 Why a bigger ratio is not automatically better
Here is where the usual advice goes wrong. If 1:3 is good, surely 1:10 is better? Rarely, because the ratio and the win rate are not independent. A target ten times your stop needs a much larger move, and large moves happen less often. Push the target far enough and your win rate collapses faster than the ratio improves.
What matters is the combination, which has a name.
Expectancy is the only number that settles the argument. A method winning 60 percent at 1:1 and a method winning 30 percent at 1:3 have almost the same expectancy. The second one just feels much worse to trade, which is a psychology problem rather than a maths one.
03 Setting targets honestly
Your target should come from the chart, exactly as your stop did. The next level of resistance, the top of the range, a measured move. If the nearest sensible target only offers 1:1, that is information about the trade, not a reason to move the target further away until the ratio looks respectable on paper.
Sometimes the right conclusion is that a setup is not worth taking. A trade that has to travel through three obvious levels to reach your target is not a 1:4 trade, it is a 1:1 trade wearing a costume.
You take 20 trades risking 100 US dollars each at 1:2, so each winner makes 200 US dollars. You win 8 and lose 12. The winners bring in 1,600 US dollars, the losers cost 1,200 US dollars, and you finish 400 US dollars ahead on a 40 percent win rate. Now run the same 20 trades at 1:1. The winners make 800 US dollars, the losers still cost 1,200, and you are down 400 US dollars. Identical trading decisions. Only the target changed.
Manufacturing a good ratio by tightening the stop rather than by finding a better target. It makes the number on your screen look excellent and quietly raises the odds of being stopped out by noise. The ratio is a description of the trade you found, not a dial you turn until it reads 1:3.
- What win rate do you need to break even at 1:3, ignoring costs?
- You risk 40 pips to make 60. What is your ratio?
- Why can a 70 percent win rate still lose money?
Show answers
1) 25 percent. 2) 1:1.5. 3) Because if the average loss is much larger than the average win, the few losses outweigh the many wins. Win rate alone tells you nothing without the sizes.
- The risk reward ratio sets how often you need to be right. At 1:3 that is only 25 percent.
- Win rate and ratio trade off against each other, so neither number means much alone.
- Expectancy combines them and is the only figure that tells you whether a method makes money.
- Take targets from the chart. Never tighten a stop just to make the ratio look better.
Anything from 1:1.5 to 1:3 is workable for most methods. What makes it good is whether you can actually hit that target often enough, which is why expectancy matters more than the ratio in isolation.
No, but it demands better than a 50 percent win rate once spread and commission are counted. Plenty of short-term strategies run at 1:1 successfully. They simply have to be right more often.
It depends entirely on your ratio. At 1:1 you need more than half. At 1:2 you need more than a third. At 1:3 you need only a quarter. Work out the breakeven rate for your ratio and treat that as the bar to clear.
Further reading: Trading operations in MetaTrader 5, the official MetaQuotes documentation, including the trading report that shows your own win rate and average win against average loss.
Size a 1:2 trade correctly with the free Position Size Calculator