Risk-to-Reward RatioRR
The risk-to-reward ratio compares how much you could lose on a trade, down to your stop, with how much you aim to gain, up to your target.
A trade that risks $100 to make $300 is described as 1:3 — one unit of risk for three of potential reward. The ratio is quick to calculate and widely quoted, but on its own it says nothing about whether a strategy makes money. That depends on how often the trade works. This entry shows how the ratio and the win rate fit together, and why a strategy can be profitable while losing most of its trades.
- Category
- Risk Management
- Reading time
- 7 min
- Also called
- Risk reward ratio, Reward-to-risk ratio, Risk/reward
- Updated
Risk-to-reward in plain words
Before entering, you know two prices: where you will get out if you are wrong (your stop) and where you plan to take profit (your target). The distance to the stop is your risk; the distance to the target is your reward.
If the stop is $5 away and the target is $10 away, you are risking 1 to make 2 — a 1:2 ratio. You could be wrong more often than right and still come out ahead, because each win is twice the size of each loss.1
How to calculate and use the ratio, step by step
Set the stop
Place the stop where the trade idea is clearly wrong. Risk per unit = entry − stop for a long, stop − entry for a short.
Set a realistic target
Choose a target the market can plausibly reach — for example the next significant resistance for a long. Reward per unit = target − entry.
Divide reward by risk
Reward ÷ risk gives R, written as 1:R. Entry $100, stop $95, target $110: risk $5, reward $10, ratio 1:2.
Compare it with the win rate you need
Before costs, the win rate needed to break even is 1 ÷ (1 + R): 50% at 1:1, about 33% at 1:2, 25% at 1:3. Risking a dollar to make a dollar needs you to be right more than half the time.
Judge the strategy by expectancy
Expectancy per trade = (win rate × R) − (loss rate × 1). A positive number means the method makes money on average, in units of risk. See Expectancy.
Skip trades that do not fit
If the nearest realistic target gives too small a reward for the risk, the trade is not worth taking — moving the target further away only changes the number, not the market.
Worked examples
Example 1 — Calculating the ratio
SetupYou plan to buy at $100, with a stop at $95 and a target at $110.
| Risk per share ($100 − $95) | $5 |
| Reward per share ($110 − $100) | $10 |
| Risk-to-reward ratio | 1:2 |
| Break-even win rate: 1 ÷ (1 + 2) | 33.3% |
If trades like this reach the target more than about one time in three, they are profitable before costs.
Example 2 — Profitable while losing most trades
ProfitA strategy wins 40% of the time, and its winners are three times the size of its losers. You risk $100 per trade over 100 trades.
| 40 wins × $300 | +$12,000 |
| 60 losses × $100 | −$6,000 |
| Net result before costs | +$6,000 |
| Expectancy: 0.4 × 3 − 0.6 × 1 | +0.6R per trade |
Wrong 60% of the time and still profitable — which is why many experienced traders aim for winners several times the size of their losers.2
Example 3 — A great ratio that still loses
LossAnother trader insists on 1:5 targets, but the targets are so far away that only 12% of trades reach them.
| Break-even win rate at 1:5 | 16.7% |
| Actual win rate | 12% |
| Expectancy: 0.12 × 5 − 0.88 × 1 | −0.28R per trade |
A high ratio is only useful if the win rate stays above the break-even level. Stretching targets lowers the win rate — the two numbers cannot be chosen independently.
The win rate you need at each ratio
Try it: does your ratio and win rate make money?
Enter a win rate, a reward-to-risk ratio, the amount you risk per trade and a number of trades. The calculator shows the break-even win rate and the expected result. It runs in your browser.
| Break-even win rate at 1:2 | 33.3% |
| Expectancy per trade | +0.20R (+$20.00) |
| Expected result over 100 trades | +$2,000.00 |
On average this combination makes money — if the win rate and ratio are real, measured over many trades.
Before commissions, spreads and slippage, which lower the real result. Actual sequences of wins and losses vary widely.
Ratio, win rate and expectancy together
Each row is a different combination. Only expectancy tells you whether it makes money.
| Aspect | Win rate | Break-even win rate | Expectancy per trade |
|---|---|---|---|
| 1:1 | 55% | 50% | +0.10R |
| 1:2 | 40% | 33.3% | +0.20R |
| 1:3 | 40% | 25% | +0.60R |
| 1:3 | 20% | 25% | −0.20R |
| 1:0.5 | 70% | 66.7% | +0.05R |
Why traders use the ratio
To filter trades
A quick check before entering: is the potential reward worth the risk, given how often trades like this work?
To plan exits
Calculating the ratio forces you to define both the stop and the target before entering.
To understand a strategy
Together with the win rate, it explains why a strategy makes or loses money.
To stay calm during losing streaks
Knowing a strategy is designed to lose more often than it wins makes a string of small losses less alarming.
Advantages and disadvantages
Advantages
- Simple to calculate before every trade.
- Forces you to define stop and target in advance.
- Explains how strategies with low win rates can be profitable.
Disadvantages
- Says nothing about probability on its own.
- Easy to manipulate by placing targets unrealistically far away.
- Ignores costs, slippage and partial exits unless you include them.
- A planned ratio often differs from the realised one after real exits.
Going deeper
Read as far as you need. Each level builds on the one before it.
Risk first, reward second
Beginner
Write the stop down before the target. Your risk is under your control; the reward is a hope the market may or may not fulfil.
Realised R and costs
Intermediate
Measure every closed trade in R: profit or loss divided by the planned risk. A trade stopped out at a worse price than planned is −1.3R, not −1R. Average realised R tells you more than planned ratios.
Commissions, spreads and slippage reduce every win and enlarge every loss. On short-term trades with small targets, they can move the break-even win rate several points higher.
Ratio, probability and trade management
Advanced
Moving a stop to break-even, scaling out at a first target or trailing the stop all change both the effective ratio and the win rate. Judge such rules by testing their effect on expectancy over many trades, not by how the ratio looks on a single setup.
Results also need enough trades to mean anything: with a 30–40% win rate, long losing streaks are normal and a few dozen trades say little about the true edge. See Sample Size and Statistical Significance.
Common mistakes
Chasing a high ratio with unrealistic targets
Setting a target at 1:5 because it looks good on paper usually lowers the win rate below the level needed to break even.
Moving the stop to improve the ratio
A tighter stop raises the ratio on paper but may sit inside normal price noise, turning a sound idea into a quick loss.
Judging a strategy by win rate alone
A 90% win rate can lose money if the rare losses are large; a 30% win rate can be very profitable with large winners.
Ignoring costs
Fees and slippage turn a planned 1:1 into something worse; always estimate the ratio after costs.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Risk-to-reward compares the distance to your stop with the distance to your target, written 1:R.
- Break-even win rate = 1 ÷ (1 + R): 50% at 1:1, 33% at 1:2, 25% at 1:3, before costs.
- Expectancy = win rate × R − loss rate × 1 decides whether a strategy makes money.
- Ratio and win rate are linked: distant targets raise the ratio but lower the win rate.
Frequently asked questions
What is a good risk-to-reward ratio?
Is it risk-to-reward or reward-to-risk?
Should I use the same ratio for every trade?
Further learning
- Position Sizing
Turn the risk side of the ratio into a position size.
- Stop Loss
The risk side starts with a well-placed stop.
- Expectancy
The single number that combines ratio and win rate.
- Take Profit
The reward side: where and how to exit winners.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- CME Group. Misconceptions of Taking Losses (opens in a new tab) Checked .
- CME Group. The Mathematics of Trading Success (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Risk-Reward Ratio (opens in a new tab)
- Investopedia: Risk/Reward Ratio (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.