The risk–reward ratio compares what you stand to lose on a trade if the stop hits to what you stand to gain if the target hits. Risking $100 to make $300 is 1:3.
There is no universally good ratio. It only means something alongside win rate.
The arithmetic
A strategy that wins 30% of the time needs a risk-reward better than 1:2.33 just to break even, before costs. One that wins 60% is profitable at 1:0.67 — it can afford to lose more per trade than it wins, because it wins more often.
Expectancy = (win rate × average win) − (loss rate × average loss)
That number is what matters. Risk–reward and win rate are its two inputs, and improving one usually costs the other.
Why traders get this wrong
The 1:3 rule you’ll see repeated everywhere assumes a win rate near 30–40%, which describes trend-following. Applying it to a mean-reversion strategy that wins 70% of the time will cut every winning trade short waiting for a target the market rarely reaches.
In systematic trading
A strategy’s realised risk–reward is an output, not a setting. It emerges from how the strategy exits — and any strategy that publishes win rate should publish average win and average loss alongside it, or the win rate means nothing.