The reward risk ratio measures the distance from your entry to your stop loss and your take profit order and then compares the two distances.
Step 1: calculating the RRR
Let’s say the distance between your entry and stop loss is 50 points and the distance between the entry and your take profit is 100 points .
Then the reward risk ratio is 2:1 because 100/50 = 2.
|Winrate to Breakeven||Minimum Reward:Risk Ratio|
|25%||3 : 1|
|33%||2 : 1|
|40%||1.5 : 1|
|50%||1 : 1|
|60%||0.7 : 1|
|75%||0.3 : 1|
Traders who understand this connection can quickly see that you neither need an extremely high winrate nor a large reward:risk ratio to make money as a trader. As long as your reward:risk ratio and your historical winrate match, your trading will provide a positive expectancy.
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