Risk and reward
What you learn in 3 minutesThis lesson shows how the distance to your stop and the distance to your target set the share of trades you need to win just to break even. On EUR/USD around 1.0850, a 20 pip stop and a 40 pip target is a ratio of 1 to 2. If you win 4 trades out of 10, the arithmetic of the ratio decides the result, not how confident you felt.
A 10 trade series at 1 to 2 with 4 wins
| Step | Amount | Note |
|---|---|---|
| Stop distance | 20 pips | the chart distance from entry to stop |
| Target distance | 40 pips | the chart distance from entry to target |
| Risk per trade | ₱1,000 | 20 pips on 0.10 lots at ₱5 per pip per 0.10 lots |
| Reward per winning trade | ₱2,000 | 40 pips at the same ₱5 per pip |
| Wins and losses | 4 wins, 6 losses | the 40% win rate in this series |
| Result | ₱2,000 | 4 times ₱2,000 minus 6 times ₱1,000 |
The broker may round the pip value, charge a spread, or quote a slightly different price at the moment of exit. The ₱5 per pip figure varies between brokers and with the exchange rate.
The mistake people make here
People judge a strategy by how often it wins, so a run of six losses in ten trades feels broken. The ratio is what decides survival, and a 1 to 2 ratio can lose more trades than it wins and still finish ahead. The mistake is widening the stop to avoid being taken out, which changes the ratio and quietly raises the win rate needed. Keep the stop where the chart says the idea is wrong, and let the ratio do its work.Check yourself
With a 20 pip stop, a 40 pip target, and 0.10 lots at ₱5 per pip, what is the result after 10 trades if 4 win?
4 wins give 4 times ₱2,000, which is ₱8,000. 6 losses give 6 times ₱1,000, which is ₱6,000. The result is ₱2,000.
If you move the stop to 40 pips and keep the target at 40 pips, what win rate do you need to break even over 10 trades at ₱1,000 risk and ₱1,000 reward?
The ratio is 1 to 1, so each win must cover one loss. You need 5 wins out of 10, which is 50%, just to break even.