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FX trading glossary · Risk

Risk/Reward Ratio

State the ratio direction

Here, risk:potential reward of 1:2 means planning to risk 1 unit in pursuit of 2 units, not earning a realised return. Platforms may reverse the notation, so check the field definition before comparing ratios.

Use fills, not targets

In ten equal-size trades, four gains of 2 units and six losses of 1 produce +2 units gross, but only if those outcomes actually occur. This arithmetic establishes neither a future win rate nor long-term profitability or maximum drawdown. Record net outcomes, costs, sample period and losing streaks separately.

A target is not a profit guarantee

This is a fixed-size illustration before costs, not a backtest or forecast. If each winner earns 2 units and each loser loses 1, the break-even win rate is 1 ÷ 3, approximately 33.33%. At 33%, expected value is 0.33 × 2 − 0.67 × 1 = −0.01 unit: a loss, not a profit.

If total cost is 0.1 unit per trade, break-even becomes (1 + 0.1) ÷ 3, approximately 36.67%. That cost is illustrative. Use actual spreads, commissions, financing and slippage, without counting the spread twice. Target and stop distances are not the same as realised average wins and losses.

Further checks

Verify the broker's licence. Investor.gov's order guide describes US securities orders; check the specific contract for forex and CFDs. FXCN calculated the illustrations from the stated assumptions. Educational information only.

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