What is risk-reward ratio?

What it means

A 2:1 ratio means the target is twice as far away as the stop, so one winner covers two losers. This converts directly into the break-even win rate: at 2:1 you need to be right about 34% of the time to break even before costs, at 1:1 you need 50%, and at 1:2 you need 67%.

Why it matters

Higher ratios are not automatically better because reaching a distant target is less likely than reaching a close one. Pushing the ratio up mechanically lowers the win rate, and past some point the loss in hit rate outweighs the gain in size. The optimum depends on the strategy and cannot be assumed.

What this changes in practice

We fix it at 2.0 across every regime. An earlier version scaled the ratio by regime — 1.6 in mixed conditions, higher in trends — and validating that against an out-of-sample period showed it was fitting noise. Reverting to a single value across the board is one of the few changes we made that improved results by removing a feature. See expectancy for why the ratio alone is not the whole picture.