Forex Risk:Reward & Expectancy
Winning trades don't make you profitable. What matters is how much you win when you are right compared with how much you lose when you are wrong. This lesson shows you how to measure that with R multiples, the risk:reward ratio and expectancy.
What is R?
R is the amount of money you risk on a trade. It is the loss you take if price hits your stop loss. If you risk $100, then 1R = $100.
Every result can be written as an R multiple: the profit or loss divided by the amount you risked.
Example
Initial risk (entry to stop): $100 → 1R = $100 Trade A closes at +$250 → +250 ÷ 100 = +2.5R Trade B hits its stop at −$100 → −100 ÷ 100 = −1R Trade C closes early at −$40 → −40 ÷ 100 = −0.4R
Tip: R multiples let you compare trades of different sizes and different account balances. A +2R trade is a good trade whether you risked $20 or $2,000. Record results in R in your trading journal.
The Risk:Reward Ratio
The risk:reward ratio (R:R) compares the distance to your stop loss with the distance to your take profit. It is decided before you enter the trade.
Example: EUR/USD long
Entry: 1.0850 Stop: 1.0830 → risk = 20 pips Target: 1.0910 → reward = 60 pips R:R = 60 ÷ 20 = 3 → written 1:3
If the target is hit, this trade earns +3R. If the stop is hit, it loses −1R.
Note: Traders write the ratio both ways ("1:3" or "3:1" or "3R"). They all mean the same thing here: the reward is three times the risk. Always check which side someone means.
Break-even Win Rate
The break-even win rate is the percentage of trades you must win just to not lose money. The bigger your reward compared with your risk, the lower it is.
| Risk:Reward | Win = | Break-even win rate | What it means |
|---|---|---|---|
| 1:0.5 | +0.5R | 66.7% | You must win 2 out of 3 trades |
| 1:1 | +1R | 50.0% | A coin flip only breaks even |
| 1:1.5 | +1.5R | 40.0% | Win 4 in 10 |
| 1:2 | +2R | 33.3% | Win 1 in 3 |
| 1:3 | +3R | 25.0% | Win 1 in 4 |
| 1:4 | +4R | 20.0% | Win 1 in 5 |
| 1:5 | +5R | 16.7% | Win 1 in 6 |
Example: check 1:2
Break-even = 1 ÷ (1 + 2) = 0.333 = 33.3% Proof over 3 trades: 1 win (+2R) and 2 losses (−1R each) Net = +2R − 2R = 0R
Warning: These figures ignore trading costs. Spreads, commissions and slippage shrink every win and grow every loss, so your real break-even win rate is a little higher. Costs hurt most on short stops: a 1.2-pip round-trip cost is 6% of a 20-pip stop but 24% of a 5-pip stop.
Expectancy: Your Edge per Trade
Expectancy is the average amount you expect to win or lose per trade over many trades. It combines your win rate with the size of your wins and losses. A strategy with positive expectancy has an edge. One with negative expectancy loses money in the long run, however good it feels.
Measured in R, with losses usually close to 1R, this becomes easy to compare between strategies.
Example 1: Low win rate, big winners
Win rate 40%, average win 2R, average loss 1R
Expectancy = (0.40 × 2) − (0.60 × 1)
= 0.80 − 0.60
= +0.20R per trade
Risking $100 per trade, over 100 trades:
100 × 0.20R × $100 = +$2,000 expected
Example 2: High win rate, small winners
Win rate 70%, average win 0.5R, average loss 1.5R
Expectancy = (0.70 × 0.5) − (0.30 × 1.5)
= 0.35 − 0.45
= −0.10R per trade
Risking $100 per trade, over 100 trades:
100 × −0.10R × $100 = −$1,000 expected
The strategy that wins 7 trades out of 10 loses money. The one that loses 6 out of 10 makes money. This surprises most new traders.
Info: Expectancy is an average. It only shows up over a large number of trades. Ten trades tell you almost nothing; aim for at least 50–100 trades of the same setup before you trust the number. See Backtesting & Statistics.
Profit Factor
Profit factor is total money won divided by total money lost. It is another way to see whether a strategy has an edge.
Example: the two strategies above, 100 trades each
Strategy 1: 40 wins × 2R = 80R profit, 60 losses × 1R = 60R loss
Profit factor = 80 ÷ 60 = 1.33
Strategy 2: 70 wins × 0.5R = 35R profit, 30 losses × 1.5R = 45R loss
Profit factor = 35 ÷ 45 = 0.78
| Profit factor | Meaning |
|---|---|
| Below 1.0 | Losing — you lose more than you win |
| 1.0 | Break-even (before costs) |
| 1.0 – 1.5 | A small edge; costs and bad luck can erase it |
| 1.5 – 2.0 | Solid edge if the sample is large |
| Above 2.0 | Very strong — double-check the sample size and for curve-fitting |
Why a High Win Rate Isn't Everything
A high win rate feels good. It is easy to sell, too: many paid signals and "robots" advertise 80–90% win rates. But a win rate alone tells you nothing about profit.
How high win rates hide losses
- Taking small profits quickly, then letting losers run.
- Moving the stop further away "to give it room".
- Trading with no stop at all (one bad day wipes out months).
- Martingale or grid systems that add to losing trades.
What to look at instead
- Average win and average loss in R.
- Expectancy per trade.
- Profit factor.
- Maximum drawdown and the longest losing streak.
Danger: A strategy with a 90% win rate that wins +0.2R and loses −3R has an expectancy of (0.9 × 0.2) − (0.1 × 3) = 0.18 − 0.30 = −0.12R. It looks great for weeks, then gives everything back.
Choosing a Realistic R:R
Bigger targets are not free. The further away your target, the less often price reaches it. Win rate and R:R always trade off against each other.
- Place targets at logical levels (the next support or resistance), not at a fixed ratio picked out of the air.
- Place stops where your idea is proven wrong, not where the ratio looks nicest. See Stop Loss & Take Profit.
- If the nearest logical target gives less than about 1:1.5, it is often better to skip the trade.
- Include costs: subtract spread and commission from the reward and add them to the risk.
- Test the trade-off. Compare the same setup with 1:1, 1:2 and 1:3 targets in a backtest and keep the one with the best expectancy.
Losing streaks are normal
Even a good strategy loses many trades in a row. A rough rule: in N trades with a loss rate p, the longest losing streak is about ln(N) ÷ ln(1/p).
Example
Win rate 40% → loss rate p = 0.60, N = 100 trades Longest streak ≈ ln(100) ÷ ln(1/0.60) = 4.61 ÷ 0.51 ≈ 9 losses in a row
Risking 1% per trade, nine losses is roughly a 9% drawdown. Risking 5% per trade, it would be about 37%. This is why position sizing matters so much.
Tip: Expectancy tells you whether to trade a strategy. Position sizing decides whether you survive long enough to collect it.
Test Yourself With Exercises
You risk 25 pips to target 75 pips. What is the risk:reward ratio?
- 1:2
- 1:2.5
- 1:3
What win rate do you need to break even on 1:2 trades (ignoring costs)?
- 33.3%
- 50%
- 25%
- 66.7%
A strategy wins 50% of trades, with an average win of 1.5R and an average loss of 1R. What is its expectancy?
- +0.50R
- +0.25R
- −0.25R
- +0.75R
Your trades made $6,000 in gross profit and $4,000 in gross loss. What is the profit factor?
- 0.67
- 2.0
- 1.5
You risked $200 on a trade and closed it for a $500 profit. What R multiple is that?
- +2R
- +2.5R
- +5R