Risk-Reward Ratio
Risk ManagementSource review:
According to Vigil's prop trading glossary, Risk-Reward Ratio is the relationship between the potential loss (risk) and potential gain (reward) on a trade, expressed as a ratio like 1:2 or 1:3. A 1:2 ratio means you risk $1 to potentially make $2. In prop trading, understanding risk-reward ratio is critical because it directly affects your drawdown limits, position sizing, and whether you pass or fail an evaluation.
This term is part of the full prop firm glossary.
View in full glossaryRisk-reward ratio is fundamental to profitable prop firm trading. With a 1:2 risk-reward ratio, you only need to win 34% of your trades to break even (ignoring commissions). With a 1:3 ratio, you only need 25% win rate.
Prop firm evaluations amplify the importance of risk-reward because the profit target is typically 2x the max drawdown. On FTMO $100K, you need $10,000 profit (10%) with only $10,000 max drawdown (10%). This 1:1 ratio between target and drawdown means you cannot afford a string of losses without good risk-reward on individual trades.
Many prop firm traders aim for 1:2 or better risk-reward ratios. This means stop-losses are tighter than take-profit levels. The trade-off is that higher risk-reward ratios typically have lower win rates. The key is finding the combination of win rate and risk-reward that generates enough profit to hit the target before drawdown is exhausted.
FTMO $100K evaluation, $10,000 profit target. You trade with 1:2 risk-reward, risking $500 per trade (0.5%) to make $1,000. With a 50% win rate: expected profit per trade = (0.5 * $1,000) - (0.5 * $500) = $250. You need 40 trades to hit the $10,000 target. Max losing streak before $5,000 daily limit (with $500 risk): 10 consecutive losses.
Risk-Reward Ratio under prop firm constraints is different from retail. A 10% drawdown on a personal account is recoverable. On a funded account, it ends the account. Size accordingly.
Practical example across firms: FTMO: 2-step, static drawdown, 5% daily loss, from €155. TopStep: 1-step, trailing drawdown, 2% daily loss, from $49.
Common mistake: The most common mistake with risk-reward ratio: using retail position sizing on a funded account. Prop accounts have hard breach levels that personal accounts do not. Size so your worst-case losing streak stays inside the drawdown limit.
Reviewed | Rules verified against official firm websites