Risk-Reward Ratio
Risk-reward expresses 'when I lose I lose 1 — how much do I make when I win?' Buy at $100,000 with a stop at $99,000 (-1%) and a take-profit at $102,000 (+2%), and your risk-reward is 1:2: risking 1 to chase 2.
A good ratio lets you survive a low win rate. At 1:2, winning just one trade in three (33.3%) puts you near breakeven — lose -1% twice, win +2% once, and the sum is zero. At 1:1 you need to win more than half; at 2:1 (losses bigger than wins) you need a rather high win rate just to break even. Working out this breakeven win rate is the most useful thing the ratio does.
At this point it's tempting to conclude 'then just make the ratio as big as possible' — but there's a catch. The farther you set the take-profit, the lower the odds that price actually gets there — your win rate falls. Risk-reward and win rate sit on a seesaw: push one up and the other usually comes down. If the win-rate drop claws back what the bigger ratio gained, you're left with nothing.
In live trading, fees and slippage push the breakeven line higher still. A 1:2 setup breaks even at 33.3% in theory, but after trading costs you need to win a few percentage points more than that.
Bottom line: risk-reward isn't a 'do this and profit' formula. It's a design tool for checking, together with the win rate, whether the expected value (EV) is positive. The real question is never the ratio itself but 'what's the actual win rate at that ratio?'
What the data actually shows
The seesaw between risk-reward and win rate shows up plainly in Barobara's historical data. On any signal's detail page, the table of TP targets shows the win rate dropping steadily as the target moves farther out (as the ratio grows). You can see the relationship for yourself on the bullish engulfing (1h) page. No combination is a profit formula — they're distributions of what happened in the past. Other signals are gathered in the setup statistics, and for real-world math you have to layer fees on top.
Common misconceptions
"Only take trades at 1:3 or better and you're automatically ahead?" No. Put the target 3x farther away and the odds of reaching it usually drop to match. If the win-rate drop offsets what the bigger ratio gained, the expected value goes nowhere — or gets worse. The ratio never improves for free.
FAQ
Q. At 1:2 risk-reward, what win rate do I need to break even?
About 33.3% before fees. Winning one trade in three breaks you even — but in practice, fees and slippage mean you need to win a bit more than that.
Q. Is a higher risk-reward ratio always better?
Inflating the number is easy — just park the take-profit very far away. The problem is that the odds of ever reaching it fall along with it. The real question is whether the expected value (EV) — the ratio multiplied against the win rate — comes out positive.