Risk-Reward Ratio Explained: What 2R Actually Means
Learn risk-reward ratio, R-multiple thinking, win rate tradeoffs, and why a beautiful chart still fails if the math is bad.
· 5 min read · risk, risk-reward, position-sizing, basics
Risk-reward ratio answers one simple question: if this trade is wrong, how much do I lose; if it is right, how much can I reasonably make? A 1:2 setup risks one unit to target two units. Traders often call that a 2R trade.
The formula
Bar comparison showing that a 10% drawdown needs 11% to recover, 25% needs 33%, 50% needs 100%, and 75% needs 300%. Deeper drawdowns require disproportionately larger recoveries.
Risk is the distance from entry to stop. Reward is the distance from entry to target. Risk-reward = reward divided by risk. If you buy at 100, stop at 95, and target 110, risk is 5 and reward is 10, so the setup is 2R.
Win rate changes the answer
A 2R setup does not need a high win rate to break even, but only if your 2R target is realistic. A trader winning 40% at 2R has positive expectancy before fees. A trader winning 60% at 0.5R can still lose money.
Do not draw fantasy targets
The target must be where price has a reason to travel: prior resistance, a measured move, VWAP, a volatility band, or a structural level. If the target exists only to make the ratio look good, the ratio is lying.
Calculate risk-reward before practice →
Frequently asked questions
Is 1:2 risk-reward always good?
No. A 1:2 setup is only good when both the stop and target are realistic for the market structure and volatility.