What Is Risk / Reward in Trading?
Risk / reward is a comparison between the amount a trader may lose on a trade and the amount they hope to gain.
It is commonly expressed as a ratio.
Example:
Risking $100 to potentially make $300 represents a 1:3 risk / reward ratio.
Why Risk / Reward Matters
Many traders focus only on whether a trade wins or loses.
Risk / reward helps traders evaluate whether the potential reward justifies the downside risk being taken.
A trader may still lose money over time even with a high win rate if losses are consistently larger than gains.
How Risk / Reward Ratios Work
Example ratios:
1:1
Risk $100 to make $100
1:2
Risk $100 to make $200
1:3
Risk $100 to make $300
Higher reward targets may reduce win rate, while lower reward targets may increase required accuracy.
There is no perfect ratio for every trader or strategy.
Break-Even Win Rate
Risk / reward also affects the win rate needed to break even.
Examples:
1:1 risk / reward requires approximately 50% win rate.
1:2 risk / reward requires approximately 33% win rate.
1:3 risk / reward requires approximately 25% win rate.
This is why many traders evaluate both risk and reward before entering a trade.
Why Traders Use Risk / Reward Planning
Some traders use risk / reward planning to:
- evaluate trade quality
- avoid poor setups
- define profit targets
- structure stop-loss placement
- improve consistency
Risk / reward does not guarantee profitable trading.
Using a Risk / Reward Calculator
A risk / reward calculator helps traders estimate the relationship between projected downside risk and potential reward.
OgleMagazine’s Risk / Reward Calculator is designed for educational trade-planning purposes only.
Final Thought
Many traders spend significant time searching for entries.
But understanding whether the potential reward justifies the risk being taken is also an important part of trade planning.
Educational Disclaimer
This content is for educational and informational purposes only and does not provide financial advice, trading signals, or guarantees.