Risk/Reward Ratio

Risk/reward ratio compares the potential loss of a trade (distance to stop loss) with the potential gain (distance to take profit). It is written as 1:2 or 1:3, where the first number is risk and the second is reward. A 1:2 ratio means risking $100 to potentially make $200. Favorable ratios (1:2 or higher) allow traders to remain profitable even with win rates below 50 percent.

Understanding risk/reward math is essential because win rate alone does not determine profitability. A strategy that wins 70 percent of the time with a 1:1 ratio is profitable. A strategy that wins 35 percent of the time with a 1:3 ratio can be equally profitable because winners are three times bigger than losers. Over 100 trades at 35 percent win rate with 1:3: 35 winners at $300 = $10,500, minus 65 losers at $100 = $6,500, producing $4,000 profit. Always calculate risk/reward before taking a trade.

For example, if you plan to go long EUR/USD at 1.0850 with a stop at 1.0820 (30 pips) and a target at 1.0920 (70 pips), your risk/reward is about 1:2.3. Risking $300 on a standard lot to potentially make $700 is an attractive setup. If the next identified setup offers only 1:1 (30 pips risk, 30 pips target), it may not be worth taking unless the strategy's historical win rate is very high on that specific pattern.

In copy trading, risk-reward ratios are built into each signal from the master strategy. SteadyFlowFX publishes a verified 1.73 profit factor on Myfxbook, reflecting an average risk-reward distribution across thousands of trades. Understanding this metric helps subscribers evaluate whether a strategy's edge is genuine before allocating capital.