Risk Reward Ratio: Why 1:3 Alone Won't Save You

You set every trade at 1:3, lose six in a row, and the account is lower than when you started. The ratio looked disciplined. It wasn’t enough on its own.

A risk reward ratio compares your loss at the stop with your gain at the target, and it only means something next to your win rate. By the end of this post you’ll know the hit rate each ratio demands and how to set both lines from the chart before you size the trade.

What is a risk reward ratio?

It is the distance from entry to stop compared with the distance from entry to target. A 20-pip stop with a 40-pip target is 1:2. The ratio is set before you enter, and it tells you the size of the bet, not the odds of winning it.

Investopedia’s definition of the risk/reward ratio frames it the same way: potential loss against potential gain. Van K. Tharp made the idea portable in Trade Your Way to Financial Freedom (1998) by calling the initial risk 1R. A trade that makes twice its risk is a 2R winner, whatever the pair or lot size.

The bars drop as the ratio grows. That’s the whole trade-off in one picture: a bigger reward per win lowers the bar, and only your real hit rate says whether you clear it.

Why can a 1:3 ratio still lose money?

Because the ratio fixes what a win pays, not how often wins come. At 1:3, three losses cost what one win makes. One win in four breaks even before costs. Win less often than that and the account shrinks, however disciplined each trade looks.

The right-hand column is the part people skip. A 1:3 plan with a one-in-four hit rate will put strings of losses on the board that feel like a broken system. Most traders quit before the sample gets big enough to judge it.

Where should the target come from?

From the chart, not from a multiple. Put the target just before the next level price has to get through: prior swing high, daily pivot, a session high. A target placed past that level is a bet that the level breaks, which is a different trade.

On the left, price reached resistance twice and rolled over, never touching the 3R line. On the right, the smaller target was filled on the first push. The left trade had the better ratio and the worse result.

The stop follows the same logic. It belongs past the price that proves the idea wrong, not at a round distance. If you want to set it from your own trade history, the maximum adverse excursion guide shows how.

How do you check the ratio before you enter?

Mark the stop, mark the target, then measure. Only then look at the ratio. If it clears the bar your hit rate sets, size the trade from the stop distance. If it falls short, skip it. Never nudge either line to rescue the number.

That order matters. Traders who start from “I want 1:3” end up drawing the target where the maths wants it. Traders who start from the levels let the market set the ratio and pass on the trades that don’t pay enough.

Sizing comes last. With stop distance known, the position sizing routine turns your fixed risk per trade into a lot size, so a wide stop means a smaller position rather than a bigger loss.

Do spread and commission change the ratio?

Yes, and the effect is largest on tight stops. The spread is paid on entry and exit, so it adds to the real distance to your stop and takes from the real distance to your target. On a small stop, a couple of pips of cost is a large share of 1R.

Say costs come to a quarter of your stop distance. The loss grows to 1.25R and the win shrinks to 1.75R, so a nominal 1:2 trade behaves closer to 1:1.4, and the breakeven hit rate climbs with it. Our breakdown of spread, commission and swap covers what each one charges. This matters because the base rate is already harsh: in March 2018 ESMA reported that between 74% and 89% of retail CFD accounts typically lose money.

Fixed ratio or structure-based targets: which should you use?

Structure first, with a minimum ratio as a filter. A fixed multiple is easy to automate and backtest, but it ignores where price is likely to stall. A structure target respects the chart, and the minimum ratio stops you taking trades that don’t pay.

The profit target playbook goes deeper on scaling out and trailing once the trade is live.

What does this ask of the levels on your chart?

It asks them to stay where they were drawn. The ratio is measured between two lines, so a stop or target level that shifts after the fact makes every past trade look better planned than it was.

RelicusRoad Pro prints its levels and signals once and doesn’t repaint them on MT4, MT5 or TradingView. It won’t choose your ratio or promise the target gets hit. It gives you fixed prices to measure from, so the ratio you logged is the ratio you had.

Frequently asked questions

What is a good risk reward ratio? There’s no single good number. A ratio is only good relative to how often your setups reach the target. A strategy that wins two in three can do well at 1:1, while one that wins one in five needs more than 1:4 to break even.

How do you calculate the risk reward ratio? Measure entry to stop, then entry to target, and compare them. A 20-pip stop and a 40-pip target is 1:2. Call the stop distance 1R, and that target is a 2R trade.

What win rate do I need for a 1:2 risk reward ratio? More than one win in every three trades, before costs. One win pays two units and two losses cost two, so that mix leaves you flat. Spread, commission and slippage push the real breakeven a little higher.

Should I always aim for 1:3? No. If the nearest resistance sits at 1.5R, a 3R target asks price to break that level first. Set the target at the level, then decide whether the trade is worth taking at the ratio the level gives you.

Does the risk reward ratio change during a trade? The planned ratio is fixed at entry. The realised one depends on your exit: breakeven stops, partial profits and trailing all change it. Log realised R per trade in your journal, not only the plan.

Before your next entry, mark the stop and the next level first, then measure. If you want those levels fixed in place while you do it, see how RelicusRoad Pro draws them.

Written for RelicusRoad by RelicusDigital.com.