The forex risk reward ratio is the simplest filter for deciding whether a trade is worth taking. It compares what you stand to gain if the trade works against what you stand to lose if it fails. A trade risking 50 pips to target 100 pips has a 1:2 risk reward ratio, meaning one win pays for two losses. Traders who consistently take trades with poor ratios need an extremely high win rate just to break even, while traders with strong ratios can be wrong more often than right and still come out ahead.

Calculating the ratio takes seconds once your levels are set. Measure the distance from your entry to your stop loss; that is your risk. Measure the distance from your entry to your take profit; that is your reward. Divide reward by risk to get the ratio. If entry is 1.1700, stop loss is 1.1680, and target is 1.1740, the risk is 20 pips and the reward is 40 pips, giving a 1:2 ratio. Never enter a trade before these three numbers are known, because entering without them means risking an unknown amount for an unknown gain.

Minimum acceptable ratios depend on your strategy's win rate, and the two must be judged together. A scalper winning seventy percent of trades can survive on 1:1 ratios, while a trend follower winning forty percent of trades needs ratios of 1:2 or better to stay profitable. The breakeven win rate for a given ratio is easy to work out: at 1:2 you need to win just over one trade in three to break even before costs, while at 1:1 you need to win more than half. Spreads and commissions push breakeven slightly higher, so build a small buffer into your expectations.

The most common mistake is forcing a good ratio by placing the stop loss too close or the target too far. A stop placed just below entry to manufacture a 1:3 ratio will be hit by normal market noise, and a target placed at an unrealistic level will rarely be reached, turning would-be winners into losers. Levels must come from the chart first, from support, resistance, structure, and volatility; the ratio is then calculated from those honest levels. If the honest ratio is poor, the correct action is to skip the trade, not to move the levels.

Another mistake is moving the target further once a trade is winning, or moving the stop further once it is losing. Extending targets mid-trade without a chart-based reason often turns winners into breakeven trades, while widening stops converts planned losses into larger ones. A disciplined alternative is partial profit-taking: close part of the position at the first target to bank gains, then let the remainder run with the stop moved to breakeven. This keeps the original ratio intact while reducing risk.

Make risk reward a hard filter in your plan. Set a minimum ratio, such as 1:1.5 or 1:2, and refuse trades below it regardless of how tempting the setup looks. Over a month, log the ratio of every trade you take and every trade you skip, and compare the outcomes. Many traders discover that their skipped low-ratio trades would have lost money anyway, which builds trust in the filter. Patience is the real skill here: waiting for trades where the maths is on your side is what separates systematic traders from impulsive ones.

Risk reward does not predict any single trade, and a perfect ratio never guarantees a win. Its power is statistical, showing up across dozens of trades as fewer catastrophic losses and steadier equity. Combine it with a sensible risk per trade, a stop loss on every position, and a journal that records ratios honestly, and you have the core of a durable trading plan. Risk note: forex trading involves risk of loss, past performance of a strategy does not guarantee future results, and this article is educational, not financial advice.