The risk reward ratio, and what it asks of you
A risk reward ratio on its own means nothing. It only becomes information when you put it next to how often you are right, because those two numbers are the whole of whether a strategy makes money. This page is that arithmetic, and the part of it people skip.
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What each ratio needs
The break-even hit rate is one divided by one plus the ratio. That is all it is, and it is worth knowing by heart because it turns an argument about style into a sum.
| Risk to reward | Right this often to break even | What it feels like |
|---|---|---|
| 1 to 1 | 50% | Every second trade. The spread and the swap come out of your half, so in practice it is more. |
| 1 to 1.5 | 40% | Two in five. The first ratio where a normal run of losses does not sink the month. |
| 1 to 2 | 33% | One in three. Comfortable on paper, and the target is already far enough to be missed often. |
| 1 to 3 | 25% | One in four, which means three losses in a row is the normal state of affairs, not a slump. |
| 2 to 1 | 67% | Two out of three, every month, forever. Almost nobody does this, and the ones who claim to are counting differently. |
Break even, not profit. Costs are not in these numbers, so treat each one as the floor rather than the target.
Why you cannot just raise the ratio
Read the table quickly and the answer looks obvious: take 1 to 3 and be right a quarter of the time. The catch is that the two numbers are not independent. A target three times your stop is three times further away, so price reaches it less often, and your hit rate falls to meet the requirement you just set.
The same works in reverse. Tightening the stop to improve the ratio moves it into the noise, where it gets hit by moves that have nothing to do with whether you were right. You have not improved the ratio, you have bought a worse hit rate with it.
What actually moves the pairing is the entry. A level where the stop can sit outside the noise and the target still has room is worth more than any rule about ratios, and it is the reason traders wait rather than take the first price.
How much to risk per trade
Nobody should hand you a number without knowing your account, and we will not. What the arithmetic can tell you is the consequence of the one you pick.
At 1 percent of the account, five losses in a row cost about 5 percent, which sits inside most daily and maximum loss limits. At 3 percent the same run is roughly 15 percent, and on a funded account that is usually the end of it.
And five in a row is not bad luck. At a 1 to 3 ratio it is what a normal month looks like, which is exactly why the two decisions have to be made together.
The position size calculator turns a percentage and a stop distance into lots, and the prop firm page has the limits each firm applies.
Where the macro comes in
None of this decides which pair to trade or which way. That is the other half, and it is the half we do: which currency the economy behind it argues for, against which, and why today.
The two halves meet in one place. A direction that is right a little more often than chance is not much use at 2 to 1, where you need two in three. It is worth a great deal at 1 to 2, where a third will do. That is the whole case for using macro for the side and the chart for the moment, and it is the reason we publish every day of our record measured without an entry or a stop: it shows the direction on its own, before any of the arithmetic on this page is applied.
Everything here is general information about how the sums work, not advice about your own trading. What you risk and where you place a stop stays your decision.
Questions about risk and reward
What is a risk reward ratio?
The distance from your entry to your stop, against the distance from your entry to your target. Risking 20 pips to make 40 is 1 to 2. It is the other half of the sum that decides whether a strategy makes money, the first half being how often you are right.
What is a good risk reward ratio?
There is no good number on its own, only a pairing. At 1 to 1 you need to be right more than half the time; at 1 to 2 you need a third; at 1 to 3 a quarter. A wider target needs a lower hit rate but is reached less often, so the honest question is which pairing your own results support.
How much should I risk per trade?
That is your decision and your firm's, and nobody should give you a number without knowing your account. What the arithmetic can tell you is the consequence: at 1 percent of the account a run of five losses costs about 5 percent, which sits inside most daily and maximum loss limits, and at 3 percent it does not. Position size calculator
Does a good ratio fix a bad hit rate?
Only up to a point, and the market has a say. A target three times your stop is further away, so price reaches it less often, and pushing the ratio up while the stop stays where the noise is just means being stopped out more. The ratio and the hit rate move against each other, which is why one without the other says nothing.
Where does macro research fit in?
It decides the side, not the ratio. Knowing which currency the macro favours against which is what stops you taking the trade that has both legs against you; where your stop and target sit is a question for the chart in front of you, and it stays yours. How the bias is built