What is Risk/Reward Ratio?
Quick answer
The risk/reward ratio compares how much you stand to lose on a trade to how much you stand to gain. A 1:2 ratio means risking one dollar to potentially make two. It matters because, together with win rate, it determines whether a strategy makes money over time: a trader can win fewer than half their trades and still profit if the winners are much larger than the losers.
The risk/reward ratio is one of the most useful ways to judge a trade or a strategy, because it puts the potential loss and the potential gain side by side instead of looking at either alone.
How the risk/reward ratio works
It is the amount you risk on a trade compared with the amount you aim to gain. Risking $100 to make $200 is a 1:2 risk/reward ratio. On its own a good ratio does not guarantee profit, because it says nothing about how often you win. It is the combination of risk/reward and win rate that determines the outcome over many trades: a high ratio can carry a lower win rate, and a low ratio needs a high win rate to work.
Why it matters in copy trading
When you evaluate a trader to copy, the risk/reward ratio helps explain their results beyond the headline win rate. A trader who wins less than half their trades can still be profitable if their winners are much bigger than their losers, and a trader with a high win rate can still lose money if their occasional losses are large. Reading risk/reward alongside win rate and drawdown gives a fuller picture of a strategy before you follow it.
Frequently asked questions
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