Forex glossary
Risk-Reward Ratio
A risk-reward comparison must state its convention. Planned reward of 200 USD and risk of 100 USD gives reward/risk = 2, or reward:risk 2:1; risk:reward is 1:2. Include costs and distinguish planned targets from realized outcomes; the ratio alone does not establish profitability.
Illustrative example
How does it work in practice?
A hypothetical trade risks 100 USD for 200 USD reward. Reward:risk is 2:1 and risk:reward is 1:2; with exactly those two outcomes and zero costs, break-even win rate is one third.
A reward ratio does not create an edge on its own
Three measures with different denominators
Model with no costs or cash flows: planned loss 100 USD, planned reward 200 USD; peak equity 12,000 USD, current equity 10,800 USD and margin 2,000 USD.
On a narrow screen, the table can be scrolled horizontally.
| Term | What it describes | Shared example |
|---|---|---|
| Risk-Reward Ratio | Compares a trade’s planned positive and negative outcomes. | Risk:reward 1:2; reward:risk 2:1. Neither guarantees a future result. |
| Drawdown | Compares current capital with an earlier peak in the same measure. | (12,000 − 10,800) / 12,000 = 10%. |
| Margin Level | Compares current equity with required collateral. | 10,800 / 2,000 × 100% = 540%. |
Takeaway: An account can have 10% drawdown and a 540% margin level simultaneously. A trade’s planned outcome ratio replaces neither measure.
Change an assumption, see the result
What changes if…?
Change planned loss and reward amounts. Compare both ratio directions; a target ratio determines neither future success nor execution.
Convention: risk:reward = 1:2 means reward/risk = 2. The model has two fixed outcomes and an identical full-trade cost. It does not predict a win rate. A stop does not guarantee the loss assumed in the plan.
Check your understanding
Name each ratio’s numerator and denominator, and separate a plan from profitability.
Show the answer and explanation
Risk:reward 1:2 and reward:risk 2:1; these are only planned ratios.
100:200 = 1:2; 200:100 = 2:1. An explicit convention removes ambiguity but cannot replace realized-outcome data.
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Related terms
Sources and documentation
- IG Academy: Risk management
The lesson compares planned loss with potential gain and explains how fees, spread and financing affect the net result.
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The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.