Risk-to-Reward and R-Multiples

Stage 3: Execution and Risk · Module 8: Risk Management and Position Sizing · Lesson 5 of 9 · Back to course

“What’s your win rate?” is the question most beginners ask about a strategy. On its own, it’s nearly meaningless. A method that wins 70% of the time can lose money, and one that wins 35% of the time can make money. The missing piece is how big the wins are compared with the losses – and the clearest way to measure that is in R.

What you’ll learn

• What risk-to-reward means and how to work it out
• What “R” is, and why traders measure results in R instead of pounds
• The break-even win rate for common ratios
• Why win rate alone tells you very little
• How to keep realistic targets

Risk-to-reward

Risk-to-reward compares what you stand to lose (entry to stop) with what you’re aiming to make (entry to target).

Example (illustrative): buy the FTSE 100 at 8,250, stop at 8,210, target at 8,330.

• Risk: 40 points. Potential reward: 80 points.
• Risk-to-reward = 40 : 80 = 1 : 2.

You’ll sometimes see it written the other way round (“2R” or “2:1 reward-to-risk”). Same idea: the target is twice the distance of the stop.

What “R” means

R is the amount you risk on a trade – the loss you’d take if your stop is hit. If you risk £40, then 1R = £40.

An R-multiple is the result of a trade divided by its R:

Result	R-multiple (with R = £40)
Stopped out, −£40	−1R
Closed early at −£20	−0.5R
Hit a 1:2 target, +£80	+2R
Closed at +£100	+2.5R

Why bother with R?

• It makes trades comparable. A +£100 win on a £50 risk (+2R) is better than a +£150 win on a £300 risk (+0.5R).
• It survives changes in account size. If you go from risking £40 to £50, your R results still mean the same thing.
• It takes some emotion out. “I lost 1R” is easier to process calmly than “I lost £40”. It’s a planned unit, not a disaster.
• It’s how you measure an edge. Expectancy, in the next lesson, is calculated in R.

The break-even win rate

For any risk-to-reward ratio, there’s a win rate you need just to break even (before costs). If you risk 1R to make XR, the break-even win rate is 1 ÷ (1 + X).

Risk-to-reward	Break-even win rate (before costs)
1 : 1	50%
1 : 1.5	40%
1 : 2	33.3%
1 : 3	25%

So a 1:2 method only needs to win a bit more than one trade in three to break even – if its wins really average 2R. Costs push the real number up: spreads, commission and overnight financing make every loss slightly bigger and every win slightly smaller.

Why win rate alone means nothing

Two made-up traders, 100 trades each, each risking 1R a trade:

	Trader A	Trader B
Win rate	70%	35%
Average win	+0.4R	+2.5R
Average loss	−1R	−1R
Total over 100 trades	70 × 0.4 − 30 × 1 = −2R	35 × 2.5 − 65 × 1 = +22.5R

Trader A wins far more often and still loses money. That’s a common pattern: taking small profits quickly and letting losses run to the stop (or beyond). It feels successful because most days are green. Trader B has more losing days, which is harder emotionally, but the maths works.

Neither profile is “right”. What matters is the combination of win rate and average win versus average loss, which is exactly what expectancy measures.

Keep targets realistic

It’s tempting to fix this by setting huge targets: “I’ll only take 1:5 trades.” But a target only counts if price actually reaches it often enough. A 1:5 target that’s hit 10% of the time is a losing method (break-even needs about 16.7%).

Better habits:

• Base targets on the chart: the next resistance or support level, a measured move, or a multiple of ATR.
• Check the ratio, don’t force it. If the nearest sensible target only gives 1:0.8, consider skipping the trade rather than stretching the target.
• Track planned R against actual R in your journal. If you plan 2R trades but your wins average 1.1R, you’re probably closing early.

Measuring a run of trades in R

An illustrative ten-trade sample, R = £40:

Trade	1	2	3	4	5	6	7	8	9	10
R	+2	−1	−1	+1.5	−1	−0.5	+3	−1	−1	+0.8

Total: +1.8R (about £72) from a 40% win rate. Ten trades is far too few to judge anything, but the habit of logging R from day one makes the next lesson much easier.

Key takeaways

• Risk-to-reward compares the distance to your stop with the distance to your target.
• R is your planned risk on a trade. Measure every result as a multiple of R.
• Break-even win rate = 1 ÷ (1 + reward ratio), before costs.
• A high win rate can still lose money if wins are small and losses are full-size.
• Set targets from the chart, then check the ratio – don’t invent targets to make the ratio look good.

Quick check

1. Risk £30, profit £75. What’s the R-multiple?
2. What win rate do you need to break even on 1:3 trades, before costs?
3. A method wins 60% of the time with average wins of 0.5R and losses of 1R. Does it make money?

Answers: 1) +2.5R. 2) 25%. 3) No: 60 × 0.5 − 40 × 1 = −10R per 100 trades.

FAQs

What’s a good risk-to-reward ratio? There isn’t one right number. It depends on how often the method hits its targets. A 1:1 method with a 60% win rate can work; a 1:3 method with a 20% win rate doesn’t.

Should I move my target further when the trade is going well? Only if your plan says so (for example, a trailing stop rule). Changing targets on a whim makes your R results unreliable.

Does R include costs? It’s best to record actual results after costs. Then your R figures show what really happened.

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Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.