The risk-reward ratio compares what you risk on a trade with what you aim to gain, measured in price distance from entry to stop loss and from entry to target. A trade risking 20 pips to make 40 pips is 1:2. A trade risking 20 pips to make 60 pips is 1:3. Traders argue endlessly about which is better, but the ratio alone proves nothing. What matters is the pair of numbers together: the ratio and the win rate that goes with it. A ratio is only an edge when the market actually delivers that win rate at that target often enough to cover costs.

The break-even win rate makes the trade-off exact. Before costs, the formula is one divided by one plus the reward multiple. At 1:1 you need to win 50 percent of trades to break even. At 1:2 you need 33.3 percent. At 1:3 you need 25 percent. At 1:4 you need 20 percent. Costs push every figure up by roughly one to three percentage points, because spread, commission, slippage, and swap all shave the reward side. So a 1:3 strategy that wins only 20 percent of the time still loses money, while a 1:2 strategy winning 40 percent is comfortably profitable before you even consider how it feels to trade. Neither number means anything without the other.

That is why bigger targets are not automatically better. A distant target gets hit less often, takes longer to reach, and spends more time exposed to news, reversals, and weekend gaps. A trader who insists on 1:3 on every setup will watch many trades come within a few pips of the target and reverse to the stop, turning would-be winners into full losers. The right target comes from chart structure: the next support or resistance level, a session high or low, or a measured move the pair actually makes in that session. Forcing a 1:3 target into a range that only ever moves 1:1.5 is not discipline; it is a ratio chosen for a poster, not for the market in front of you.

Test the question on your own record instead of borrowing someone else's answer. Take your last fifty or one hundred trades for one setup, and calculate expectancy: win rate times average win, minus loss rate times average loss, all in R. Then ask what would have happened with partial exits, earlier targets, or trailing stops, and record realised R rather than planned R, because a trade closed early at 1.4R contributes 1.4R, not the 3R on the plan. If your data shows a setup reaches 2R often but rarely reaches 3R, then 1:2 is the better target for that setup, whatever a guru says about 1:3. Different setups earn different targets, and a good trader holds both ideas at once.

Use a simple rule to finish. Set the stop where the setup is invalidated, not where the ratio looks nice. Set the target where the market has actually gone before, not where the maths looks impressive. Then check the pair: if the resulting ratio is below your minimum, skip the trade rather than moving the stop closer to manufacture a ratio. Skipping is a valid outcome, and it is usually the outcome that protects the account. Forex and CFD trading carries a high risk of loss, and no ratio removes that risk. What a well-chosen ratio does is make your edge measurable, so you can keep it, drop it, or fix it with evidence instead of hope.

One more check protects the whole calculation: recompute your ratio after costs, not before them. Subtract the spread and commission from the reward side and add any expected slippage to the risk side, then see whether the trade still clears your minimum. Many trades that look like 1:2 before costs are barely 1:1.5 after them, and that honest version is the only one your account will ever experience. Traders who skip this step systematically overestimate their edge.