Risk-Reward Ratio
The ratio of expected profit to risked loss on a single trade — a 1:2 risk-reward means the trader risks $1 to make $2.
Definition
Risk-reward ratio (R:R) is the ratio of the profit target's distance to the stop-loss distance, expressed as risk:reward. A trade with a 20-pip stop and a 40-pip target is 1:2 — the trader risks 1 unit to make 2. Higher R:R ratios mean smaller win rates can still produce positive expectancy: a 1:3 R:R strategy needs only a 25% win rate to break even, while a 1:1 strategy needs 50%. Most systematic prop traders aim for 1:2 or higher because it allows room for losing streaks without blowing up. R:R is calculated before the trade, not after — using the original stop and target, not any adjustment made mid-trade.
Example
Why It Matters
R:R interacts directly with prop firm consistency rules. A trader using a 1:5 R:R strategy produces very asymmetric trade outcomes — small frequent losses and rare large wins. That win distribution can fail a consistency rule that requires no single day or single trade to exceed a percentage of total profit, because a rare R:R hit becomes a disproportionately large share of total gains. Traders using high-R:R strategies on consistency-ruled firms need to size down the outsized-win trades or accept that they may need multiple profitable days to dilute the concentration below the rule threshold.