Forex Take-Profit Targets and Placement: Understanding Risk-Reward Ratio
Are you unsure where to place your take-profit, or how to think about risk-reward?
In short, decide the ratio of your take-profit distance to your stop-loss distance first, then check expected value together with your win rate.
This article covers three placement patterns, the link to win rate, partial profit-taking and how to handle the psychology.
Key takeaways
- Decide take-profit as a ratio to your stop-loss distance (risk-reward), not on its own.
- The break-even win rate is 1 ÷ (1 + RR), so RR 1:2 needs a win rate of about 33% at minimum.
- The three placements are just before a recent high or low, a multiple of ATR and a fixed RR; avoid pulling your take-profit closer.
In short: set take-profit as a ratio to your stop-loss distance
- Decide your take-profit distance together with your stop-loss distance, as a ratio (risk-reward)
- The break-even win rate is calculated as 1 ÷ (1 + RR)
- The three basic placements are recent highs and lows, a multiple of ATR and a fixed RR
- Cashback adds only a little to expected value and is not a substitute for win rate
What is the risk-reward ratio?
The risk-reward ratio (RR) is the ratio of your take-profit distance to your stop-loss distance. If your stop-loss is 20 pips and your take-profit is 40 pips, the RR is 1:2.
It shows how much you aim to gain when the amount you lose on one trade is 1. As a rule, do not decide take-profit on its own; think of it together with your stop-loss.
| RR (stop-loss : take-profit) | Stop-loss distance | Take-profit distance | Losses recovered by one win |
|---|---|---|---|
| 1:1 | 20 pips | 20 pips | 1 loss |
| 1:2 | 20 pips | 40 pips | 2 losses |
| 1:3 | 20 pips | 60 pips | 3 losses |
How win rate and risk-reward relate
The larger the RR, the lower the win rate at which you break even. The break-even win rate can be calculated as 1 ÷ (1 + RR).
| RR (take-profit ÷ stop-loss) | Break-even win rate | How to read it |
|---|---|---|
| 0.5 | About 66.7% | You need to win at least 2 out of 3 trades just to break even |
| 1.0 | 50.0% | Wins and losses are equal in number to break even |
| 1.5 | 40.0% | Winning 2 out of 5 trades breaks even |
| 2.0 | About 33.3% | Winning 1 out of 3 trades breaks even |
| 3.0 | 25.0% | Winning 1 out of 4 trades breaks even |
Three ways to place a take-profit
The basis for take-profit falls into three groups: the shape of the chart, the size of price moves, or a fixed RR. Which one suits you changes with your method and timeframe.
| Pattern | Basis | Idea | Note |
|---|---|---|---|
| Just before a recent high or low | Chart shape | For buys, place it slightly before the recent high. For sells, before the recent low | Price can reverse before reaching it, so leave some margin |
| Volatility-based | A multiple of ATR | Use something like 1.5 to 3 times the average range as the take-profit distance | The multiple changes by method, so it needs testing |
| Fixed RR | A multiple of the stop-loss distance | Fix the ratio, such as 1.5 or 2 times the stop-loss distance | It can land in a spot that does not fit the chart |
Place it just before a recent high or low
Recent highs and lows are places where orders gather and price tends to reverse. For a buy, many traders place their take-profit slightly before that level.
If you place it exactly on the level, price may turn back a few pips short. Allowing a margin of a few pips can reduce the profit you miss.
Place it at a multiple of ATR
ATR is an indicator of the average price range over a set period. If the ATR is 15 pips, for example, you would use twice that, 30 pips, as your take-profit distance.
The range changes by currency pair and time of day. This approach adapts to market conditions more easily than a fixed number of pips.
Place it with a fixed RR
Once your stop-loss distance is set, you place the take-profit at 1.5 or 2 times that distance. The rule is simple, which makes testing and record keeping easy.
However, if there is a high or low acting as a wall at that level, it becomes harder to reach. Look at the chart and check that the position is realistic.
Partial profit-taking and trailing stops
Taking profit does not have to mean closing everything at one point. You can close in parts, or have your stop-loss follow the price.
- Partial profit-taking: close half the position at target 1 and let the rest run
- Moving to break-even: once target 1 is reached, move the stop-loss on the rest to your entry price
- Trailing stop: have the stop-loss follow the price automatically
- The trailing stop in MT5 works only while the terminal is running
The psychology of cutting profits short, and what to do about it
Once an unrealized profit appears, you become afraid of losing it and want to close early. This is often called taking profits too early.
If you win small and lose big, the RR is reversed and your funds shrink even with a high win rate. The effective way to handle psychology is through a system.
- Place your take-profit order at the same time you enter
- Decide in advance that you will not move your take-profit once an unrealized profit appears
- Close half early and let the rest run with a calmer mind
- Record why you closed, and review it later
If you move it, move it only in your favor
Pulling your take-profit closer tends to undermine your plan. If you adjust anything, limit it to moving your stop-loss toward your entry price.
Expected value example (USD account)
Expected value shows how much you gain or lose on average per trade. It can be calculated from your win rate and your average profit and loss.
- 1
Set the conditions
Assume a stop-loss of $50, a take-profit of $100 (RR 1:2) and a win rate of 40%.
- 2
Work out the expected win
$100 × 40% comes to $40.
- 3
Work out the expected loss
$50 × 60% comes to $30.
- 4
Subtract
$40 − $30 is about +$10 per trade. If the stop-loss amount is 1, that is about 0.2.
| Win rate | RR 1:1 ($50/$50) | RR 1:2 ($50/$100) | RR 1:3 ($50/$150) |
|---|---|---|---|
| 30% | −$10 | $0 | +$10 |
| 40% | −$5 | +$10 | +$25 |
| 50% | $0 | +$25 | +$50 |
How take-profit relates to cashback
Many cashback schemes are calculated based on trading volume. Whether a trade closed at take-profit or at stop-loss counts needs to be checked for each broker.
Cashback amounts are not yet confirmed and will be published on each broker page at launch. Treat it as a small addition to expected value, and avoid closing early just for the rebate.
- Cashback does not make up for a shortfall in win rate or RR
- Raising your lot size to chase rebates leads to bigger losses
- Calculate your own expected value including spread
Enter your win rate and the stop-loss and take-profit amounts to check the expected value per trade. Try it with the numbers from your own method.
Calculate expected valueFAQ
Q.How many pips should a forex take-profit be?
There is no fixed right answer. It is common to think in terms of the ratio to your stop-loss distance (risk-reward) and decide together with market references such as recent highs and lows or ATR. Avoid deciding on a fixed number of pips alone.
Q.What risk-reward ratio is good?
It depends on the combination with your win rate. At RR 1:2, you move past break-even once your win rate exceeds about 33%. Because costs such as spread exist, you need to leave some margin in your settings.
Q.How do I calculate the risk-reward ratio?
Divide the take-profit distance by the stop-loss distance. With a 20-pip stop-loss and a 40-pip take-profit, the RR is 2 (1:2). The break-even win rate is calculated as 1 ÷ (1 + RR).
Q.How can I stop closing my profits too early?
Placing your take-profit order at the same time you enter and not moving it once an unrealized profit appears is an effective rule. Closing half early and letting the rest run also works. Record your reasons after each trade and review them.
This article is for information purposes only and is not investment advice. Conditions may change, so please check each broker's official page for the latest information. Offshore FX and CFD trading carries a risk of losses exceeding your principal.
