A risk-to-reward ratio compares two possible outcomes of a trade plan. It says nothing by itself about how likely either outcome is. A target three times farther away than a stop can look attractive in a screenshot while being reached infrequently, becoming unavailable after a late entry, or producing much smaller realised profits after partial exits.
To avoid ambiguous labels, this guide writes reward divided by risk as a number and risk:reward as a pair. A reward/risk result of 2 corresponds to risk:reward of 1:2. All prices, trade counts and costs below are hypothetical educational examples, not a setup to execute.
Define entry, invalidation and target first
For a fictional long position entered at 100, with a protective exit planned at 95 and a target at 110, the risk distance is 100 minus 95 = 5. Reward distance is 110 minus 100 = 10. Reward/risk = 10 divided by 5 = 2, written as 1:2 risk:reward.
For a short, a protective stop belongs above the entry and a profit target below it. A short at 100, stop at 104 and target at 92 has distances of 4 and 8, again 1:2. An absolute-distance calculator can still return a number for incorrectly arranged prices, so check the direction before interpreting the output.
| Entry / stop / target | Risk distance | Reward distance | Risk:reward |
|---|---|---|---|
| 100 / 95 / 110 | 5 | 10 | 1:2 |
| 104 / 95 / 110 | 9 | 6 | 1:0.67, approximately |
Translate distances into consistent cash outcomes
Price distance is sufficient for a simple ratio when the same linear quantity and currency conversion apply to both exits. For cash planning, write the quantity and contract assumptions. An illustrative ten-unit long from 100 has a $50 gross loss at 95 and a $100 gross profit at 110 if each price unit is one dollar per unit held.
For futures, forex crosses, inverse contracts or an account in another currency, use the instrument's actual profit calculation and conversion. A symmetrical price-distance ratio is not automatically a symmetrical account-currency ratio. Estimate both outcomes using the same rules and describe what the estimate excludes.
Include costs without counting them twice
Suppose the ten-unit example has an assumed $4 of separate round-trip charges in either outcome. Net profit at the target becomes $96; net loss at the stop becomes $54. Net reward/risk = 96 divided by 54, approximately 1.78, rather than 2.
If your opening and closing prices are actual executable fills, the bid/ask difference is already reflected in those prices. Do not subtract the same spread again. Financing varies with holding time and slippage can differ by outcome, so a single fixed cost assumption is an exercise rather than a forecast of every future trade.
Calculate break-even win rate only under explicit assumptions
If every win earns exactly W and every loss loses exactly L, with costs included consistently, the break-even winning proportion is L ÷ (W + L). In the $96/$54 example that is 54 divided by 150 = 36%. This assumes only those two outcomes; partial wins, break-even exits and variable losses require their own accounting.
An illustrative 20 wins and 30 losses would produce 20 × $96 minus 30 × $54 = $300. With only 15 wins and 35 losses, the result becomes $1,440 minus $1,890 = −$450. The attractive target distance has not changed, but the realised outcome distribution has. Neither sample estimates the probability of an unrelated new trade.
Separate planned R from realised R
One R is a clearly defined initial planned loss amount, not the amount you decide to tolerate after a trade moves against you. If the original R is $50, a realised $75 gain is +1.5R and a $70 loss is −1.4R. Changing the stop later should be recorded as a plan change rather than rewriting the original denominator to improve the statistic.
For a partial exit, combine all legs and costs. Closing half at +1R and half at +2R produces +1.5R gross for equal-sized halves, not +3R. A trade journal should preserve the original plan, subsequent changes and final cash result so these distinctions remain visible.
Use a repeatable review
- Write the long or short direction and actual proposed entry, not the entry in an old screenshot.
- Check that the stop reflects the stated invalidation and that the target has a reason beyond producing a preferred ratio.
- Convert outcomes using the same contract, volume and account currency; include charges and an adverse execution case.
- Review observed realised wins and losses, sample period, trade count and rejected or expired setups.
- Compare concentration across simultaneous trades. Several individually attractive ratios can share the same losing scenario.
Common questions
- Does 1:3 mean a one-in-four chance of losing? No. The ratio describes planned amounts, not odds.
- Can a high win-rate strategy lose money? Yes. Large or infrequent losses and costs can outweigh many small gains.
- Does Quantora's displayed calculator ratio establish a good trade? No. It divides entered distances and does not validate direction, costs, probability or suitability.