What is risk-to-reward ratio?
A risk-to-reward ratio compares the potential loss you accept if a trade reaches its stop loss with the potential gain if it reaches its target. It is a planning metric, not a guarantee that either price will be reached.
If you risk €100 to target a €200 gain, the potential reward is twice the potential risk. Traders commonly describe this as a 1:2 risk-to-reward ratio.
How do you calculate risk-to-reward?
Determine the distance between your entry and stop loss, then the distance between your entry and profit target. Divide potential reward by potential risk.
A result of 2 corresponds to 1:2. A result of 3 corresponds to 1:3.
Risk-to-reward example
Entry: $100
Stop loss: $98
Target: $106
Risk per unit = $2
Potential reward per unit = $6
$6 ÷ $2 = 3 → 1:3 risk-to-reward
Risk-to-reward and win rate work together
A larger potential reward does not automatically make a strategy better. Risk-to-reward needs to be considered together with how often trades win, actual execution, costs and whether planned targets and stops are realistically reached.
A trading journal lets you compare the risk-to-reward you planned with the results you actually produced over many trades.
Track the numbers behind your trades.
Record entry, exit, stop loss, take profit, risk and R:R in your Trading Island journal. Then review your performance over time.
Open your free journal →Common risk-to-reward mistakes
- Choosing a target only to create an attractive ratio. A large target is not useful merely because the number looks good.
- Ignoring win rate. R:R describes payoff size, not how often a setup succeeds.
- Confusing planned R:R with realized R:R. Early exits, moved stops or slippage can change the actual result.
- Ignoring trading costs. Fees, spreads and slippage can reduce realized performance.
- Judging a strategy from only a few trades. Small samples can be noisy.
Should every trade have the same risk-to-reward?
Not necessarily. Different setups, market structures and exit methods can produce different potential ratios. The useful comparison is between your planned trade logic and your actual results over a meaningful set of trades.
Frequently asked questions
Is a 1:2 risk-to-reward ratio good?
A 1:2 ratio means planned reward is twice planned risk. Whether that produces positive results depends on win rate, actual average wins and losses, costs and execution.
What does 1:3 risk-to-reward mean?
It means three units of potential reward for each one unit of potential risk. Risking €100 with a €300 target is a simple example.
Can a strategy be profitable with a low win rate?
Mathematically, sufficiently large average wins relative to average losses can offset a lower win rate. Actual profitability still depends on the complete distribution of results and costs.