Risk to Reward Ratio: The Arithmetic Behind Break-Even
How reward-to-risk and win rate combine into expectancy, with the break-even table every trader should know.
Reward to risk compares what an idea can return to what it costs when wrong. It is measured from the entry to the target and from the entry to the invalidation point — not from the entry to a hoped-for move.
The ratio only becomes meaningful when paired with win rate, because together they produce expectancy.
Measuring the ratio honestly
Distance to invalidation is set by structure: the price at which the idea is wrong. Distance to target should be set by the next structural obstacle, not by the ratio you would like to have.
Adjusting the stop to manufacture a better ratio is the most common way traders convert a losing setup into a losing setup with a tighter stop.
Break-even win rates
For a given reward-to-risk, there is a win rate at which the strategy breaks even before costs. At 1:1 it is 50 percent. At 2:1 it is roughly 33 percent. At 3:1 it is 25 percent. Below those numbers, the strategy loses money even though individual winners look large.
Costs move every figure against you. Spreads, commissions and financing should be included before judging a strategy as viable.
- 1:1 requires about 50% wins to break even
- 2:1 requires about 33%
- 3:1 requires about 25%
- Costs raise every requirement
Expectancy
Expectancy per trade equals win rate times average win, minus loss rate times average loss. Expressed in risk units it becomes comparable across instruments and position sizes, which is why journals should record results in units of risk.
Why high ratios are not automatically better
Targets far away are reached less often. A strategy with a 5:1 average reward and a 12 percent hit rate can be perfectly viable and psychologically very hard to run, because it produces long losing sequences.
Choose the ratio you can execute consistently, and record deviations when you cut winners early.