Risk Reward Ratio Strategy for Forex

Risk reward ratio (R:R) is the relationship between what you risk on a trade and what you stand to gain. Understanding and applying proper R:R is one of the most important concepts for profitable trading.

What is Risk Reward Ratio?

Risk reward ratio compares:

• Risk: Potential loss (entry to stop loss)
• Reward: Potential profit (entry to take profit)

Formula:

R:R = Potential Profit / Potential Loss

Calculating Risk Reward

Example Calculation

Trade Setup:

• Entry: 1.1000
• Stop Loss: 1.0950 (50 pips risk)
• Take Profit: 1.1150 (150 pips reward)

R:R Ratio:

150 pips / 50 pips = 3, written 1:3 on this page (risk 1 to make 3)

For every 1 pip risked, you potentially gain 3 pips.

Common R:R Ratios

Why R:R Matters

The Win Rate Connection

R:R and win rate determine profitability:

Key Insight: With 1:3 R:R, you only need to win 25% of trades to break even.

Example Scenario

10 Trades with 1:3 R:R:

• Risk per trade: $100 (1% of a $10,000 account)
• Reward per trade: $300
• Win 3, lose 7 (30% win rate)

Result:

• Wins: 3 × $300 = $900
• Losses: 7 × $100 = $700
• Net profit: $200

Even losing 70% of these trades, the set made money before costs. Illustrative figures only, not a forecast.

Minimum R:R Guidelines

General Rule

Minimum 1:2 R:R recommended:

• Gives buffer for reality
• Accounts for slippage
• Allows for partial wins

By Trading Style

Planning R:R Before Entry

Step 1: Identify Stop Loss First

Determine where you're wrong:

• Technical invalidation point
• Support/resistance level
• Swing high/low

Stop comes from analysis, not arbitrary distance.

Step 2: Identify Target

Determine realistic target:

• Next support/resistance
• Measured move
• Fibonacci extension

Target comes from analysis too.

Step 3: Calculate R:R

Compare:

• Distance to stop
• Distance to target
• Ratio acceptable?

Step 4: Decide to Trade

If R:R < minimum:

• Don't take the trade
• Wait for better setup
• Or adjust (with caution)

If R:R meets criteria:

• Proceed with trade
• Execute the plan

Adjusting for Better R:R

Tighter Stop

Approach:

• Enter at better level
• Use lower timeframe for precision
• Reduce stop distance

Caution:

• Don't make stop too tight
• Still needs to give trade room
• False precision = stopped out

Larger Target

Approach:

• Identify further target
• Use multiple targets
• Trail stop for extended move

Caution:

• Target must be realistic
• Based on structure, not hope
• Over-optimistic targets rarely hit

Better Entry

Approach:

• Wait for pullback
• Enter at support/resistance
• Better entry = better R:R

Caution:

• May miss the trade
• Patience required
• Balance entry quality with opportunity

Multiple Targets Strategy

Why Use Multiple Targets

• Lock in some profit early
• Allow rest to run
• Balance certainty with potential

Implementation

Example with 1 lot:

• Target 1 (0.5 lot): 1:1 R:R
• Target 2 (0.3 lot): 1:2 R:R
• Target 3 (0.2 lot): Trail for more

Effective R:R: Combination of targets creates blended R:R

Adjusting Stop After Target 1

When first target hit:

• Move stop to breakeven
• Or lock in small profit
• Rest of position = "free trade"

R:R and Win Rate Combinations

High Win Rate, Low R:R

Example: Scalping

• Win 70% of trades
• R:R 1:1
• Works with discipline

Challenge: Need high win rate consistently

Lower Win Rate, High R:R

Example: Trend following

• Win 35% of trades
• R:R 1:3
• Works with patience

Challenge: Need to handle many losses emotionally

Finding Your Balance

Different personalities suit different approaches:

• Need wins for motivation? Higher win rate style
• Can handle losses? High R:R style
• Test and find your fit

Common R:R Mistakes

Ignoring R:R

Trading without calculating:

• "Looks like a good trade"
• No target or stop planned
• Random results

Unrealistic Targets

Setting targets too far:

• Based on hope, not analysis
• Rarely reached
• False sense of good R:R

Stops Too Tight

Forcing better R:R:

• Stop too close
• Stopped out constantly
• Win rate suffers

Moving Targets Closer

During trade:

• Fear of giving back profit
• Reduce target
• Destroys R:R
• Stick to plan

Moving Stops Further

During trade:

• Hope price will come back
• Stop moved back
• R:R destroyed
• Never do this

R:R in Practice

Trade Evaluation Checklist

Before every trade:

1. ☐ Stop loss level identified (technical reason)
2. ☐ Target level identified (technical reason)
3. ☐ R:R calculated
4. ☐ R:R meets minimum requirement
5. ☐ Position sized for risk amount

Tracking R:R

In your journal:

• Planned R:R
• Actual R:R
• Did you stick to plan?
• Patterns in profitable trades

Improving Your R:R Over Time

Review Trades

Look at completed trades:

• What R:R worked best?
• Where did you exit early?
• Where did you overstay?

Find Your Edge

Identify patterns:

• Certain setups give better R:R
• Certain conditions improve results
• Focus on those

Optimize Entry/Exit

Continuous improvement:

• Better entries = better R:R
• Better targets = hit more often
• Incremental improvements add up

Key Takeaways

• Risk reward ratio compares potential profit to potential loss
• Minimum 1:2 R:R recommended for most trading
• Higher R:R allows profitability with lower win rate
• Calculate R:R before entering every trade
• Stop loss comes from technical analysis, not R:R manipulation
• Don't adjust stops during trade to maintain R:R
• Track your actual R:R to improve
• Find the R:R and win rate combination that suits you

What's Next?

Learn about stop loss strategies forex for proper trade protection.

This article is for educational purposes only and does not constitute financial advice.