What Is the Risk/Reward Ratio in Trading? How to Calculate It
The risk/reward ratio shows how much you're willing to lose on a trade for a potential gain. It's calculated before entering, using the stop-loss and take-profit.
How to calculate it
Risk is the distance from the entry to the stop-loss. Reward is the distance from the entry to the take-profit. Divide one by the other.
Example. Entry $100, stop $95, take-profit $110. Risk $5, target $10. The ratio is 1:2 — for every dollar of risk, you're aiming for two.
Why it matters
| Ratio | Share of trades you need to win to break even |
|---|---|
| 1:1 | about 50% |
| 1:2 | about 33% |
| 1:3 | about 25% |
Fees not included. The better the ratio, the lower the win rate you need. But a distant target is reached less often — it's a trade-off.
Rules
- Calculate before entering, not after.
- A stop-loss is mandatory — without it you can't calculate risk.
- Don't move your stop further away to "give the trade a chance."
- Calculate position size based on risk — see how to calculate position size.
How to set a stop and a take-profit is covered in take-profit and stop-loss.
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- Risk/reward is the distance to the stop versus the distance to the target.
- A better ratio means you need fewer winning trades.
- It's calculated before entering, and a stop is mandatory.
Frequently asked questions
What ratio is considered good?
Many traders aim for 1:2 or higher. But the target needs to be realistic, at the nearest level.
What is R?
A unit of risk. If the risk on a trade is $10, then a $30 gain is 3R, and a loss at the stop is minus 1R.
Can I trade with a 1:1 ratio?
You can, but then you need to win more than half your trades after fees, and that's hard.
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