Risk and reward
The arithmetic behind the ratio
Every trade has two prices that matter after you enter: the stop and the target. The stop is where you accept the idea is wrong. The target is where you take the profit. The distance from entry to stop is your risk in pips. The distance from entry to target is your reward in pips. The ratio is simply reward divided by risk. On EUR/USD around 1.0850, a 20 pip stop and a 40 pip target give a ratio of 1 to 2, because 40 divided by 20 is 2.
That ratio sets a fixed number: the share of trades you must win to break even. The formula is risk divided by the sum of risk and reward. With 20 pips risk and 40 pips reward, the sum is 60. So 20 divided by 60 is one third, about 33.3%. If you win more than one third of your trades at that ratio, you finish ahead before costs. If you win less, you finish behind. The ratio does not care how you felt about the trade.
The same formula works for any ratio. If you risk 30 pips to make 60 pips, the ratio is 1 to 2 again, and the break-even win rate is still one third. If you risk 20 pips to make 20 pips, the ratio is 1 to 1, and the break-even win rate is 20 divided by 40, which is 50%. The arithmetic is fixed. What is not fixed is the ratio you can actually get from the chart in front of you.
Why the ratio you get is not the ratio you choose
You do not pick the ratio from a menu. You read it from the chart. The stop belongs where the chart would prove your idea wrong: below a swing low if you are buying, above a swing high if you are selling. The target belongs where the chart shows a likely barrier: a previous high, a round number, or a measured move. The distance between those two levels is the ratio the market is offering at that moment. It changes as price moves.
On EUR/USD around 1.0850, a swing low might sit 20 pips below your entry, and the next resistance might sit 40 pips above. That gives 1 to 2. But if the swing low is 35 pips away and resistance is only 40 pips away, the ratio is closer to 1 to 1.1. The chart decides. You can wait for a better chart, or you can accept the ratio you have. What you cannot do is pretend the ratio is better than it is.
This is why two people can trade the same pair on the same day and get different results. One waits for a chart where the stop is tight and the target is far. The other enters where the stop must be wide and the target is close. The first needs to win less often. The second needs to win more often. Neither is wrong in advance. But the ratio each one accepts sets the win rate each one needs.
How the stop distance changes the win rate you need
Widening the stop feels safer because it gives the trade more room to breathe. But it changes the ratio, and the ratio changes the win rate you need. Suppose you start with a 20 pip stop and a 40 pip target. The break-even win rate is one third. Now you move the stop to 40 pips and keep the target at 40 pips. The ratio becomes 1 to 1. The break-even win rate becomes 40 divided by 80, which is 50%. You now need to win half your trades just to break even.
The effect is larger than it looks. At 1 to 2, you can lose six out of ten trades and still finish ahead. At 1 to 1, losing six out of ten means you finish behind. The same six losses, the same ten trades, a different result. The only thing that changed was where you put the stop. The market did not become more volatile. Your idea did not become worse. You simply moved the line that defines being wrong.
There is a second cost. A wider stop means a larger loss when the stop is hit. If you risk 40 pips instead of 20, and your position size stays the same, each loss takes twice as much from your account. To keep the same money risk, you must halve your position size. That keeps the loss in pesos the same, but it also halves the profit in pesos when the target is hit. The ratio in pips stays 1 to 1. The ratio in money stays 1 to 1. Nothing is improved by widening the stop alone.
A 10 trade series at 1 to 2 with 4 wins
| Step | Amount | Note |
|---|---|---|
| Stop distance | 20 pips | the chart distance from entry to stop |
| Target distance | 40 pips | the chart distance from entry to target |
| Risk per trade | ₱1,000 | 20 pips on 0.10 lots at ₱5 per pip per 0.10 lots |
| Reward per winning trade | ₱2,000 | 40 pips at the same ₱5 per pip |
| Wins and losses | 4 wins, 6 losses | the 40% win rate in this series |
| Result | ₱2,000 | 4 times ₱2,000 minus 6 times ₱1,000 |
The broker may round the pip value, charge a spread, or quote a slightly different price at the moment of exit. The ₱5 per pip figure varies between brokers and with the exchange rate.
Doing it once, step by step
The following steps walk through reading a ratio from a chart and checking what it does to the win rate you need. Do them in order once, with a chart open beside you.
- 01
Mark the entry, stop, and target on the chart
Find a recent EUR/USD chart around 1.0850. Mark the price where you would enter. Mark the swing low below it if you are buying, or the swing high above it if you are selling. Mark the next clear barrier in the opposite direction as your target. Count the pips from entry to stop, and from entry to target.
- 02
Divide reward by risk to get the ratio
Take the target distance in pips and divide it by the stop distance in pips. If the target is 40 pips and the stop is 20 pips, the ratio is 2, written as 1 to 2. If the target is 30 pips and the stop is 30 pips, the ratio is 1, written as 1 to 1. Write the ratio down before you think about the trade.
- 03
Calculate the break-even win rate
Divide the stop distance by the sum of the stop and target distances. With a 20 pip stop and a 40 pip target, the sum is 60, and 20 divided by 60 is about 33.3%. That is the share of trades you must win to break even before costs. Compare it with how often your chart reading has actually worked in the past.
- 04
Check the money risk at your position size
Multiply the stop distance in pips by the pip value for your lot size. If the pip value is ₱5 and the stop is 20 pips, the risk is ₱100. If you widen the stop to 40 pips at the same lot size, the risk becomes ₱200. To keep the risk at ₱100, you must reduce the lot size. The pip value varies between brokers and with the exchange rate.
- 05
Compare the required win rate with a realistic one
Look back at twenty or thirty past chart setups of the same kind. Count how many would have reached the target before the stop. That gives a rough win rate. If your required win rate is higher than that, the ratio is not workable for you. If it is lower, the ratio gives you room. Do not adjust the stop to make the number look better.
- 06
Record the ratio and the result for each trade
For every trade you take, write down the ratio you accepted and whether it won or lost. After ten trades, add up the wins and losses in pesos. Compare the result with what the ratio predicted. Over time, this record shows whether your chart reading gives you a ratio you can survive. The record is the only honest measure.
The mistake most people make here
People judge a strategy by how often it wins, so a run of six losses in ten trades feels broken. The ratio is what decides survival, and a 1 to 2 ratio can lose more trades than it wins and still finish ahead. The mistake is widening the stop to avoid being taken out, which changes the ratio and quietly raises the win rate needed. Keep the stop where the chart says the idea is wrong, and let the ratio do its work.Check yourself
With a 20 pip stop, a 40 pip target, and 0.10 lots at ₱5 per pip, what is the result after 10 trades if 4 win?
4 wins give 4 times ₱2,000, which is ₱8,000. 6 losses give 6 times ₱1,000, which is ₱6,000. The result is ₱2,000.
If you move the stop to 40 pips and keep the target at 40 pips, what win rate do you need to break even over 10 trades at ₱1,000 risk and ₱1,000 reward?
The ratio is 1 to 1, so each win must cover one loss. You need 5 wins out of 10, which is 50%, just to break even.
Questions that come up next
Why does the break-even win rate change when I move my stop?
Moving the stop changes the risk in pips, so it changes the ratio. If you widen the stop from 20 pips to 40 pips while the target stays at 40 pips, the ratio goes from 1 to 2 down to 1 to 1. The break-even win rate then rises from about 33.3% to 50%. The arithmetic is fixed, so a wider stop always demands more wins.
What win rate do I need at a ratio of 1 to 3?
The formula is risk divided by the sum of risk and reward. With 20 pips risk and 60 pips reward, the sum is 80. So 20 divided by 80 is one quarter, which is 25%. You need to win more than 25% of trades to finish ahead before costs. The same formula gives 33.3% at 1 to 2 and 50% at 1 to 1.
How do I find the ratio from the chart before I enter?
Mark the price where your idea would be proved wrong. That is the stop. Mark the next likely barrier in the direction you expect price to move. That is the target. Measure both distances in pips and divide the target distance by the stop distance. The result is the ratio the chart is offering at that moment.
Can I still lose money if I win more than the break-even share?
Yes. Spread, commission and the pip value your broker applies all come out of the result. The break-even win rate is calculated before those costs. If the costs are large relative to your target, you may need a higher win rate than the formula alone suggests. The ₱5 per pip figure varies between brokers and with the exchange rate.
What does a run of losses at 1 to 2 tell me?
It tells you the sequence, not the edge. At 1 to 2 you can lose six trades out of ten and still finish ahead if the four wins are full size. A losing run is expected inside a ratio that needs only about one win in three. What matters is whether your stop was placed where the chart said the idea was wrong.
Does a higher ratio mean a better strategy?
No. A higher ratio usually comes with a lower hit rate, because the target is further away and price reaches it less often. A 1 to 3 ratio needs only 25% wins to break even, but those wins are rarer. The ratio and the win rate move together, so neither number means much on its own.
The words used on this page
- stop
- The price at which you accept your idea is wrong and close the trade. It sets your risk in pips. It belongs where the chart would prove the idea false, not where your account feels comfortable.
- target
- The price at which you take your profit. It sets your reward in pips. It belongs at a likely barrier such as a previous high or a round number.
- ratio
- Reward in pips divided by risk in pips. A 20 pip stop and a 40 pip target give 1 to 2. The ratio sets the share of trades you must win to break even.
- break-even win rate
- The share of trades you must win for the wins to cover the losses, before costs. The formula is risk divided by the sum of risk and reward. At 1 to 2 it is about 33.3%.
- pip
- The smallest standard step in a currency pair's price. On EUR/USD around 1.0850, one pip is 0.0001. The money value of one pip varies between brokers and with the exchange rate.
- swing low
- A price point where the market stopped falling and turned up. Buyers often place a stop just below it. It is one of the levels the chart uses to set the risk side of the ratio.
What to take away
- The ratio of reward to risk fixes the share of trades you must win to break even.
- At 1 to 2 that share is about 33.3%, at 1 to 1 it is 50%, and at 1 to 3 it is 25%.
- The ratio you can get comes from the chart, not from a preference, and it changes as price moves.
- Widening the stop to avoid being taken out lowers the ratio and raises the win rate you need.