Trading glossary

Risk to reward ratio: meaning in trading

The risk to reward ratio compares what a trade risks with what it aims to make, for example 1:3.

A 1:3 trade risks 10 pips to make 30. The higher the reward compared with the risk, the fewer trades you need to win.

The maths

At 1:3 you only need to win more than one trade in four to break even, before costs. Win four in ten and you are well ahead: four wins of +3 is +12, six losses of 1 is -6, a net +6.

A high ratio only helps if the target is realistic, which is why we aim at real liquidity rather than a random number.

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