Risk-reward ratio explained, and why a 1:3 trade can still lose money

The risk-reward ratio (R:R) is the most quoted number in trading, and one of the most misunderstood. A "1:3 setup" sounds great, but on its own it tells you very little about whether a strategy makes money.

This guide explains what the ratio actually measures, how it links to your win rate, and why the number you see on a chart is usually better than the one you actually get.

What the risk-reward ratio measures

For a single trade:

Risk = distance from entry to stop × position size

Reward = distance from entry to target × position size

R:R = reward ÷ risk

Long BTC at 60,000, with a stop at 59,400 and a target at 61,800, risks 600 per coin to make 1,800. That's an R:R of 3, usually written 1:3 or 3R.

Position size cancels out, so R:R only depends on where your entry, stop and target are. It's a property of the plan, not of the result.

The win rate you need to break even

A higher R:R means each win pays for more losses. That lowers the win rate you need to break even:

Break-even win rate = 1 ÷ (1 + R:R)

Risk-reward	You need to win at least
1:1	50.0% of trades
1:1.5	40.0%
1:2	33.3%
1:3	25.0%

This is why R:R and win rate always have to be read together. A 1:3 strategy that wins 20% of the time loses money. A 1:1 strategy that wins 60% of the time makes money.

Expectancy: the number that actually matters

Put the two together and you get expectancy, the average result per trade, measured in R (multiples of what you risked):

Expectancy (R) = win rate × average win in R − loss rate × average loss in R

With a 40% win rate, wins of 2R and losses of 1R:

0.40 × 2 − 0.60 × 1 = +0.2R per trade

If you risk $10 a trade, that's an average of $2 per trade over time. It's small, but it's positive, and over hundreds of trades that's what counts.

Why a 1:3 trade can still lose money

1. Far targets get hit less often

Moving your target further away raises the R:R on paper, but it also lowers the chance the price gets there. If stretching from 2R to 3R drops your win rate from 40% to 22%, your expectancy goes from +0.2R to −0.12R. The ratio got better and the strategy got worse.

2. Fees shrink the reward and grow the risk

On perpetual futures you pay a fee to open and another to close, charged on the full position value. On a losing trade the fees are added to your loss. On a winning trade they're taken off your profit.

Take the BTC example with 0.015 BTC and 0.055% fees on each side:

• Loss at the stop: $9.00 of price risk + $0.99 of fees = $9.99
• Gain at the target: $27.00 − about $1.00 of fees = $26.00

The chart says 3.00. The real ratio is 26.00 ÷ 9.99 ≈ 2.60. On tight stops the gap gets much bigger, because the fees stay the same size while the price distance shrinks.

3. You don't hold to the target

If you often take profit early "just in case" but always let the stop get hit in full, your average win in R ends up far below the planned R:R. Your journal is the only way to find out. Compare the R:R you planned with the R you actually made.

How to use R:R well

• Set the stop first, where the idea is proven wrong. Then look at whether a sensible target gives a ratio worth taking.
• Include fees when you judge whether a setup is worth it, especially with tight stops.
• Track results in R, not just dollars, so trades of different sizes are comparable.
• Check expectancy per setup after 20 to 30 trades. A setup with a great planned R:R and negative expectancy isn't a great setup.

TradeTurtle shows the R:R of every trade as you plan it, records the R you actually made, and breaks down average R and expectancy by setup, emotion and asset, so you can see which of your setups really pay.