Risk/Reward Ratio

How much you stand to gain compared with how much you stand to lose on a trade.

Also called: rr · r:r · r/r · reward to risk · risk to reward

In plain language

The ratio compares the distance from entry to target against the distance from entry to stop. Risk $2 to make $6 and the ratio is 1:3.

It is a property of the trade’s geometry alone. Account size and position size do not change it — only where you place the entry, the stop and the target.

Paired with your win rate, it tells you whether a strategy makes money. At 1:3 you only need to be right about 25% of the time to break even before costs. At 1:1 you need better than 50%.

The formula

Risk/Reward Ratio

Reward Per Share ÷ Risk Per Share

Reward Per Share: Distance from entry to take profit
Risk Per Share: Distance from entry to stop loss
Break-even Win Rate: 1 ÷ (1 + Ratio) × 100

Worked through

A 1:2 strategy that wins 40% of the time, over 100 trades

40 wins at +2R: +80R
60 losses at −1R: −60R
Net: +20R
Break-even win rate for 1:2: 33.3%

Losing six trades out of every ten and still finishing ahead is not a trick. It is what a 1:2 ratio buys: each win covers two losses, so the strategy only needs to be right a third of the time to stand still, and anything above that is profit.

This is the calculation that settles arguments about entries. A trader agonising over a setup that wins 55% of the time at 1:1 is doing worse than one taking a sloppier 40% setup at 1:2 — the second makes 20R over a hundred trades and the first makes 10R.

The honest version has costs in it. Spread and commission come off every trade, and they come off the small side hardest: a 1:2 that costs 0.1R a round turn is really 1.9 up against 1.1 down, and the break-even win rate creeps from 33.3% to about 36.7%. That is still a comfortable margin, but it is not free, and on a 1:1 strategy the same costs are the difference between profitable and not.

Change the numbers

This is the concept as a working tool. Edit any field and watch what moves — that relationship is the thing worth remembering.

Try it yourself

Direction

LONGSHORT

Entry

Stop Loss

Take Profit

Risk Per Share: $2
Reward Per Share: $6
Risk / Reward: 1 : 3

At 1 : 3 you only need to be right 25% of the time to break even. Spread and commissions push that threshold a little higher.

Open the full risk/reward calculator

Seen on a chart

Reward is measured entry to target, risk is measured entry to stop. Here the reward band is three times the height of the risk band — a 1:3 trade.

Why it matters

It converts a vague sense that a trade "looks good" into a number you can test against your actual win rate. Most losing strategies fail here, not at the entry.

Common mistakes

Moving the target further out to manufacture a better ratio on paper.
Chasing high ratios with targets price realistically never reaches.
Judging the ratio without accounting for spread and commissions, which hit the small side hardest.