Risk to reward: why 1 : 2 changes everything

Risk to reward compares what you can lose to what you aim to make. If your stop is 30 pips away and your target is 60 pips away, the ratio is 1 : 2.

The win rate you need to break even is 1 ÷ (1 + reward). At 1 : 1 you need 50%. At 1 : 2 you need 33%. At 1 : 3 just 25%. Better ratios give you room to be wrong, which every trader is, often.

You plan a buy at 4,166 with a stop at 4,160: 60 pips of risk. The nearest liquidity above, the previous high, is at 4,184: 180 pips away. That is 1 : 3.

If the previous high were at 4,172 instead, the reward would be 60 pips: only 1 : 1. You would need to win more than half the time just to break even. Better to wait for a deeper entry or a clearer target.

Over a series of trades, the difference is large. Ten trades at 1 : 3 with four wins and six losses end positive. Ten trades at 1 : 1 with the same record end negative.

• Moving the target closer out of fear. If you change the plan mid-trade, the maths you relied on disappears.
• Picking a target to fit the ratio. Targets come from the chart. If the chart does not offer 1 : 2, skip it.
• Widening the stop to avoid being stopped. That quietly ruins the ratio and the risk.
• Forgetting spread and commission. On small targets, costs take a big share of the reward.

• 1 : 1 with 50% winners: 5 wins, 5 losses, net 0R. You are working for the broker.
• 1 : 2 with 40% winners: 4 × 2R − 6 × 1R = +2R.
• 1 : 3 with 30% winners: 3 × 3R − 7 × 1R = +2R.
• 1 : 3 with 40% winners: 4 × 3R − 6 × 1R = +6R.

A target is not a wish. A sensible target is the next pool of liquidity or the opposite side of the range. If that level gives less than 1 : 2, either refine the entry or skip the trade.