The short answer
Reward-to-risk compares planned upside with planned downside. For 2 units of reward per 1 of risk, the simplified break-even win rate is 33.33% before costs. Actual average results can differ from the plan.
- Calculate reward-to-risk from entry, stop and target.
- Estimate the win rate needed to break even before costs.
- Separate an attractive ratio from a credible trading setup.
Build the ratio from price levels
For a long example, planned risk is entry minus stop and planned reward is target minus entry. Divide reward by risk. An entry at 100, a stop at 96 and a target at 108 has four units of risk and eight units of potential reward, or 2:1 reward-to-risk.
For a short example the direction reverses, but absolute distances keep the arithmetic readable. The stop and target should reflect invalidation and market structure; moving either number only to produce a prettier ratio makes the calculation less useful.
Connect the ratio to break-even win rate
A 2:1 reward-to-risk plan has a theoretical break-even win rate near 33.3% before costs because one full winner offsets two full losses. A 1:1 plan needs about 50%. This does not mean any 2:1 setup is profitable: real exits can be partial, stops can slip and fees reduce expectancy.
Expectancy combines average win, average loss and the frequency of each. Review a meaningful sample rather than assuming that the target will be reached exactly.
Use realistic levels and record the outcome
Check whether the target sits beyond a likely barrier, whether the stop is inside ordinary noise and whether liquidity supports the planned size. Record planned and realised R-multiples so you can see whether execution matches the model.
A skipped trade can be a good outcome when the available reward does not compensate for the defined risk. The ratio supports consistency; it does not create certainty.
- Define invalidation before calculating size.
- Include fees, spread and possible slippage.
- Track realised R, not only planned R.
- Never widen risk after entry to preserve hope.
A planned ratio and an observed average can differ
Partial exits, slippage and altered stops can make actual payoffs differ from the chart plan. Keep both measures in your journal and compare a resolved sample before drawing conclusions.
| Measure | What it describes |
|---|---|
| Planned reward/risk | Target distance ÷ stop distance |
| Observed payoff | Average gross win ÷ average gross loss |
| Net expectancy | Probability-weighted outcome after costs |
A ratio is not an edge
A plan risking $25 to seek $50 has a quoted 2:1 reward-to-risk ratio. Its theoretical break-even win rate before costs is about one win in three, but that calculation does not say how often the target can actually be reached.
Add spread and slippage to both sides of the worksheet. A target on a chart is not an executable sale at that exact price; review outcome and execution separately.
A 2R plan
Entry 50, stop 48 and target 54 creates 2 of risk and 4 of potential reward. The plan is 2R, but only if 48 genuinely invalidates the idea and 54 is a plausible exit—not numbers chosen after seeing the ratio.
Choose the next useful step
- Risk-reward ratio calculator
Calculate risk, potential reward, reward-to-risk ratio and theoretical break-even win rate from entry, stop and target prices.
- Trading expectancy calculator
Calculate average trading expectancy, cost-adjusted break-even win rate and payoff ratio from win rate, average win, average loss and costs per trade.
- How to keep a trading journal that teaches you something
Create a useful trading journal with pre-trade reasoning, risk, execution notes, screenshots and post-trade review prompts.
Carry these four ideas forward.
- Mark entry, stop and target.
- Calculate risk before reward.
- Compare the break-even rate with tested evidence.
- Record costs and realised R.
Three questions before the next tab.
Choose the answer that best matches the lesson. This is a memory check, not a market signal.
Continue with original sources.
These links provide definitions and current context. Product rules, regulation and network details can change, so verify time-sensitive information at the source.
Before you move on
Is a higher risk-reward ratio always better?+
No. A distant target may be less likely to fill, and a very tight stop may be hit by ordinary movement.
What does 1R mean?+
One R is the initial amount planned to be lost if the setup is invalidated.
Does the ratio predict profit?+
No. It describes a planned payoff relationship and must be combined with probabilities, costs and execution.