Risk-Reward Ratio
The risk-reward ratio compares how much a trade could lose with how much it could gain, usually measured from the entry price to the stop loss and to the profit target.
How it is calculated
Take the distance from your entry to your stop loss: that is the risk per unit. Take the distance from your entry to your take-profit target: that is the potential reward. Dividing one by the other gives the ratio.
Conventions differ. Some people write risk first, so 1:3 means risking 1 to make 3. Others quote reward-to-risk, so the same trade is described as 3 or 3R. Always check which way round a number is meant.
A worked example
Say you buy at 100 with a stop loss at 95 and a target at 115. The risk is 5 per unit and the reward is 15, so the risk-reward ratio is 1:3. With a position sized to lose 100 dollars at the stop, reaching the target would earn about 300 dollars, before fees.
Why win rate matters as well
A good ratio alone says little. What counts is the combination of ratio and how often trades actually reach the target. With a 1:3 ratio you could lose three out of four trades and roughly break even before costs. With a 1:1 ratio you need to win more than half the time just to stay ahead after fees.
That is why traders track both numbers in a trading journal. A strategy with modest ratios and a high hit rate can work, and so can one with large ratios and frequent small losses.
Common traps
A ratio is only as honest as the levels behind it. Placing a target far away to make the ratio look good does not make the price more likely to get there. Moving the stop further away during a losing trade quietly destroys the planned ratio.
Real results also differ from the plan because of fees, funding costs on leveraged positions and slippage when stops fill at worse prices. A 1:2 plan can end up closer to 1:1.5 once these are included.
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Frequently asked questions
What is a good risk-reward ratio?
There is no universal threshold. Many traders look for a reward at least as large as the risk, but whether a ratio works depends on how often the strategy reaches its targets.
Is 1:3 the same as 3:1?
They usually describe the same trade written in opposite order, risk-to-reward versus reward-to-risk. Context tells you which convention is used.
Does a high ratio make a trade safer?
No. It describes the payoff if things go as planned, not the probability that they will.
Related terms
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