Risk Reward Ratio Explained: Why It Beats Win Rate

By Josh Molnar · June 2026 · 6 min read

Branded card explaining the risk reward ratio concept for traders

If I could only teach one concept to a new trader, it would not be entries, chart patterns, or which coin to buy. It would be the risk reward ratio. This single idea decides whether a strategy makes money or bleeds out slowly, and most beginners get it completely backwards. So let me explain the risk reward ratio in the simplest way I can.

What is a risk reward ratio?

Your risk reward ratio compares how much you stand to lose on a trade versus how much you stand to gain. If you risk 100 dollars to potentially make 200 dollars, your ratio is 1 to 2. Risk 100 to make 300, and it is 1 to 3. That is it. No complicated math. Just: how much am I putting on the line versus how much am I trying to collect?

Every trade you take has this number built in, whether you calculate it or not. The difference between a profitable trader and one who slowly goes broke is that the profitable trader knows this number before clicking the button.

Why your risk reward ratio matters more than your win rate

Most people think trading is about being right as often as possible. It is not. Here is the part that surprises everyone: you can win only 4 out of every 10 trades and still make money, if your winners are big enough compared to your losers.

Think about it this way. If every loss costs you 100 dollars and every win pays you 300 dollars:

10 trades at a 40 percent win rate means 4 wins and 6 losses.
4 wins at 300 dollars each: 1,200 dollars gained.
6 losses at 100 dollars each: 600 dollars lost.
Net result: plus 600 dollars, even though you were wrong more than half the time.

Now flip it. Imagine you win 7 out of 10 trades but your winners only pay 50 dollars while your losers cost 200 dollars:

7 wins at 50 dollars: 350 dollars gained.
3 losses at 200 dollars: 600 dollars lost.
Net result: minus 250 dollars, even though you were right 70 percent of the time.

That second trader has a great win rate and still loses money. This is why I tell everyone I mentor: stop chasing a high win rate. Chase a good ratio instead.

The breakeven cheat sheet

Every ratio has a minimum win rate where you stop losing money and start keeping some. Here are the round numbers:

1 to 1 ratio: you need to win more than 50 percent of your trades to come out ahead.
1 to 2 ratio: you need to win more than about 34 percent.
1 to 3 ratio: you need to win more than 25 percent. That means you can be wrong on three out of four trades and still break even.

The bigger your ratio, the more room you have to be wrong. And trust me, you will be wrong a lot. Every trader is. The ones who survive are the ones whose winners cover their losers with room to spare.

How to set up a good risk reward ratio

This is where it gets practical. Before every trade, I identify two levels on the chart: my stop (where I am wrong and I get out) and my target (where I take profit). The distance from entry to stop is my risk. The distance from entry to target is my reward. If the reward is not at least 1.5 to 2 times the risk, I skip the trade entirely. No exceptions.

This connects directly to how much you risk per trade. Your risk per trade sets the dollar amount. Your risk reward ratio decides whether those dollars compound into something real or quietly disappear. You need both working together.

The trap most traders fall into

Here is the thing nobody talks about. A good ratio only works if you actually let the winner run to your target. Most traders set a 1 to 3 target, then panic and close at 1 to 1 because they are afraid of giving back profit. They cut winners short and let losers run, which is the exact opposite of what works.

If you find yourself closing winners early and holding losers hoping they come back, your real ratio is much worse than the one you planned. The fix is mechanical rules. Write down your target before you enter. Do not touch it. This is part of what it takes to trade for a living: boring, repeatable discipline that compounds over months, not a hot streak over one afternoon.

Risk reward ratio on funded accounts

If you trade prop firm accounts, this becomes even more critical. Most funded accounts have strict rules about how much you can lose in a day and in total. A bad ratio means you burn through that loss limit fast, even if your entries are decent. A strong ratio (1 to 2 or better) means each winner buys you several more chances to be wrong. That cushion is what keeps you funded.

The bottom line

Your risk reward ratio is the single best predictor of whether a trading approach makes money over time. Forget obsessing over being right. Focus on making your winners bigger than your losers, set the ratio before every trade, and then actually follow through. It is simple, boring, and the reason some traders are still here years later while most are not.

Common questions

What is a good risk reward ratio for day trading?

Most professional day traders aim for at least 1 to 2, meaning the potential gain is twice the potential loss. A 1 to 3 ratio is even better because you can be wrong on most trades and still come out ahead.

Can you be profitable with a low win rate?

Yes. A trader who wins only 40 percent of the time can be very profitable if each winner pays two or three times more than each loser costs. The ratio matters more than the percentage.

How do you calculate risk reward ratio?

Measure the distance from your entry to your stop loss (that is your risk) and the distance from your entry to your profit target (that is your reward). Divide reward by risk. If risk is 100 and reward is 250, your ratio is 1 to 2.5.

Is a 1 to 1 risk reward ratio bad?

Not automatically, but it means you need to win more than half your trades just to break even. Most traders find it much easier to stay profitable with a ratio of 1 to 2 or higher, because it gives more room for losing streaks.

Why do most traders ignore risk reward ratio?

Because win rate feels more rewarding in the moment. Winning 8 out of 10 trades feels great even if the math says you are losing money. Traders who focus on the ratio instead of the feeling are the ones who last.

Keep reading

I trade and teach this for a living. I post free breakdowns on Instagram and YouTube, and you can trade alongside me and the community at bitcoindaily.vip. For one-on-one help, work with me directly.

Nothing here is financial advice. Trading carries a real risk of loss and most traders lose money. Never trade money you cannot afford to lose.