The risk-reward ratio compares the amount a trade risks (entry to stop-loss) with the amount it targets (entry to take-profit). A trade risking $100 to make $300 has a 1:3 risk-reward ratio — each win pays for three losses.
Its real use is the breakeven arithmetic it implies. The win rate needed to break even is risk ÷ (risk + reward): 50% at 1:1, 33.3% at 1:2, 25% at 1:3, before costs. Any strategy is just a pairing of achieved win rate and achieved risk-reward, and it only makes money if the first number clears the breakeven set by the second.
A caution: the ratio describes the planned trade, not the outcome. Wide targets look great on paper but get hit less often, so “improving” risk-reward usually lowers win rate. Only the realized combination — measured over a real sample — matters.
Entry $100, stop $98, target $106: risk $2, reward $6 → 1:3. Breakeven win rate = 1 ÷ (1 + 3) = 25% before costs.