Take profit orders and risk-reward ratio
Learning objectives
Express a trade's outcome in R, and explain why that unit is more useful than currency
Calculate the win rate a given risk-reward ratio needs simply to break even
Recognise why a high ratio on its own tells you nothing about whether a method makes money
The other side of the coin
The previous lesson fixed what you lose when you're wrong. This lesson is about the other side: what you're aiming for when you're right, and how the two numbers relate.
The importance of R
Once your risk per trade is fixed, you have a natural unit of measurement.
1R is your risk on the trade. If you're risking $5, then 1R is $5. A trade that makes $10 made 2R. A trade that hits its stop lost 1R.
This is more useful than counting in dollars for one specific reason: it makes results comparable across different account sizes and different trades. A trader up 8R over forty trades has a result you can actually evaluate. A trader up $340 has a number that means nothing until you know how much they were risking to get it.
From here on, targets are expressed in R.
Risk-reward ratio
Your risk-reward ratio is the distance to your target divided by the distance to your stop.
Anna enters EUR/USD at 1.0850 with her stop at 1.0825, so her risk is 25 pips. If her target is 1.0900, her reward is 50 pips. That's a ratio of 1:2, or a 2R target.
Easy enough. Now the part that gets skipped.
But a ratio on its own tells you nothing
You will see it claimed that trading 1:3 or better makes you profitable. It doesn't. A ratio only means something when paired with how often you win.
Here's the breakeven win rate for each ratio, which is the minimum you need just to stand still:
| Risk-reward | Breakeven win rate |
|---|---|
1:1 | 50% |
1:2 | 38% |
1:3 | 25% |
1:5 | 17% |
The formula is straightforward: breakeven win rate = 1 ÷ (1 + R).
Read the table carefully, because it cuts both ways. A trader winning 60% of trades at 1:1 is profitable. A trader winning 20% of trades at 1:3 is not, despite the impressive-sounding ratio. Neither number is good or bad by itself.
And these figures assume costs of zero. Spread, commission and financing all come out of your winners, so in practice you need to clear the breakeven rate by a margin rather than match it.
The trap: buying a ratio you can't collect
Here's how the ratio gets gamed, usually without the trader realising.
If you want a better ratio, you can simply move your target further away. A 25-pip stop with a 25-pip target is 1:1. Move the target to 100 pips and you have 1:4. The spreadsheet looks better immediately.
But the market didn't change. A target four times further away gets reached far less often, so your win rate falls at the same time as your ratio rises. Sometimes that trade is worth making. Often it isn't, and the trader has manufactured an attractive number by making the trade less likely to work.
The ratio is a description of a trade, not a lever you pull.
Where a target actually belongs
Same discipline as the stop in the previous lesson. The target comes from the chart, not from arithmetic convenience.
Ask where the price is plausibly going before something stops it. A previous high. A level that has turned price back repeatedly. The opposite edge of a range. Those are places the market has demonstrated it reacts to.
Then measure the resulting ratio and decide whether the trade is worth taking:
- If the plausible target gives you 2R, that's a reasonable trade.
- If the plausible target gives you 0.5R, the trade needs a very high win rate to be worthwhile, and you should probably skip it.
That's the real function of risk-reward. It's a filter applied before entry, not a target invented after it. You use it to decline trades, which is most of what good filters do.
Partial exits
One middle path worth knowing about: closing part of the position at a nearer target and letting the rest run to a further one.
It genuinely helps with the psychological problem from lesson F2.1, where the fear of giving back a gain causes traders to close everything too early. Taking something off the table makes holding the remainder much easier.
It also caps your best outcomes, since your biggest winners are now only partly sized. There's no free lunch here, just a trade-off between consistency and upside. Choose deliberately and apply it the same way every time, rather than deciding trade by trade based on how nervous you feel.
The honest limit
No ratio rescues a method with no edge.
If your entries are essentially random, you can arrange any risk-reward you like and the expected result stays negative once costs are counted. Risk-reward governs how a working method performs. It doesn't create one.
What it does do, reliably, is stop a working method being wasted by targets that were never realistic and stops that were never respected.
Key takeaways
1R is your risk on the trade. Measuring results in R makes them comparable across account sizes and trades in a way currency amounts aren't
Risk-reward ratio means nothing without win rate. Breakeven win rate is 1 ÷ (1 + R), and costs mean you need to clear it rather than match it
Moving a target further away improves the ratio and lowers the win rate at the same time. The two cannot be separated
Set targets at levels the market plausibly reaches, then use the resulting ratio as a filter to decline trades that aren't worth taking