The risk reward ratio compares the loss planned for a trade with its potential gain. If the stop is 10 points from entry and the target is 20 points away, the risk reward ratio is 1:2. The first number is the amount at risk. The second is the intended reward. This ratio helps traders compare setups before entry, but it does not measure the chance of winning. A distant target can look attractive while remaining unlikely to fill.
Readers asking about risk reward ratio need the formula, the required win rate, and a way to compare the planned ratio with actual exits. This guide covers all three.
Quick Answer: Risk Reward Ratio in One Calculation
Use price distance, not hope.
Risk reward ratio = distance from entry to stop divided by distance from entry to target.
For a long trade, risk is entry minus stop. Reward is target minus entry. For a short trade, reverse those subtractions. Keep both numbers in the same unit, such as pips, ticks, or points.
Suppose an index entry is 18 points from the stop and 36 points from the target. Divide both by 18. The result is 1:2. A losing trade costs 1R, and a full winner returns 2R before costs.
A ratio is only a plan until the position closes. Slippage can enlarge the loss. An early exit can shrink the reward. The executed reward ratio belongs in the journal beside the planned one.
Who is this page for?
This page is for a trader who can define an entry and stop but wants to judge the target more systematically. It also helps anyone comparing trading strategies with different win rates, holding periods, and costs.
What to Know Before Using a Risk Reward Ratio
A good ratio creates asymmetric outcomes. Several ordinary losses may be offset by fewer larger winners. That property matters because no trading strategy wins every time.
However, the risk reward ratio does not show probability. A 1:5 target is not automatically better than a 1:2 target. The wider target may fill much less often.
| Planned ratio. | Break-even win rate before costs. | Main pressure. |
|---|---|---|
| 1:1. | 50%. | Accuracy must remain high. |
| 1:1.5. | 40%. | Early profit-taking can erase the edge. |
| 1:2. | About 33.3%. | Winners must reach the full target. |
| 1:3. | 25%. | Long losing streaks become normal. |
The break-even rate follows this formula:
Break-even win rate = risk divided by risk plus reward.
At 1:2, risk is one unit and reward is two. One divided by three equals about 33.3%. Costs push the required rate higher.
This is where risk and volatility interact. A volatile market may require a wider stop. If the target cannot widen without crossing an unrealistic price area, the ratio becomes weaker. Reduce position size rather than forcing a tight stop into normal noise.
How to Calculate Risk Reward Before an Order
Follow the same order for every trade.
- Mark the price that invalidates the idea.
- Measure the distance from proposed entry to that stop loss.
- Mark a target supported by structure, not by a preferred ratio.
- Measure the entry-to-target distance.
- Divide both distances by the risk distance.
- Estimate spread, commission, and possible slippage.
- Recalculate after the actual fill.
Long example in pips
A currency-pair setup has an entry with a 16-pip stop. The next meaningful target is 28 pips away. Divide both values by 16. Planned risk reward is 1:1.75.
If spread and slippage consume 2 pips across entry and exit, the usable reward falls. The trader should record the adjusted potential rather than the cleaner chart distance.
Short example in ticks
A futures trade sells after a failed breakout. The stop is 12 ticks above entry. The first target is 24 ticks below. Planned ratio is 1:2.
The contract specification decides the value of each tick. Position size then decides the account loss at the stop. The ratio remains 1:2 at any size, but the account risk does not.
Leverage and margin also leave the ratio unchanged while magnifying the equity impact. The SEC explains that margin positions can be liquidated after an account falls below its requirements in its margin guidance.
Planned Reward Versus Executed Reward
Compare styles without forcing one target
Different trading styles can use different ratios without one being superior. A scalping setup may pursue a small move and depend on a higher hit rate. A swing setup may accept a lower hit rate for a wider target. The relevant comparison is expectancy after costs, not the label attached to the style.
A trend-following trade may also move the stop as structure develops. In that case, record the initial risk and every rule-based adjustment. A range trade might take profit near the opposite boundary because that level defines the premise. Extending the target beyond the range only to display a larger ratio weakens the logic.
Market regime changes the inputs. Wide volatility can increase stop distance, while thin liquidity can worsen entry and exit prices. Volume, session timing, and the order type affect whether the displayed potential is reachable.
Before comparing two strategies, standardise the notation. Some journals write risk first as 1:2. Others describe reward first as 2:1. Write the words beside the numbers until the convention is automatic.
Most ratio mistakes appear after entry. A trader plans to risk 1R for a 2R target, then moves the stop or exits at the first small profit. The chart plan and the executed result become different strategies.
Track four fields:
- Planned risk. Entry to original stop.
- Planned reward. Entry to original target.
- Realised loss. Final loss measured in R.
- Realised reward. Final gain measured in R.
Consider twenty trades with a planned 1:2 ratio. Eight reach the target, and twelve hit the stop. The planned result is 16R gained minus 12R lost, or 4R before costs.
Now add actual behaviour. Three winners were closed at 0.7R, while five reached 2R. Winners contribute 12.1R instead of 16R. The sample finishes at 0.1R before costs. A positive-looking plan has almost no room left.
This example shows why profit targets alone are insufficient. The trader needs an exit rule that can be executed under normal market conditions. The SEC’s day-trading risk publication also warns that frequent trading costs can raise the break-even point.
Win Rate, Expectancy, and a Worked Sample
Expectancy combines the reward ratio with the win rate.
Expectancy = win rate multiplied by average win, minus loss rate multiplied by average loss.
Take a hypothetical strategy with a 42% win rate. The average winner is 1.6R, and the average loser is 1R.
Multiply 0.42 by 1.6R to get 0.672R. Multiply the 58% loss rate by 1R to get 0.58R. Subtract the second value from the first. Expectancy equals 0.092R per trade before costs.
Across fifty trades, expected value from those sample inputs is 4.6R. This is not a forecast. A different sequence can finish far above or below the mean.
Now stress the inputs. If average reward falls from 1.6R to 1.3R, the calculation becomes 0.546R minus 0.58R. Expectancy turns negative.
The lesson is not to chase a higher win rate. It is to test win rate and reward together. Regulators caution that past performance does not indicate future results, and the same caution applies to a backtest.
How losing streaks fit the ratio
A strategy that wins one trade in three can still work with a sufficiently large average winner. It will also experience frequent losing sequences. Risk per trade must survive those sequences without triggering emotional changes.
Judge the potential loss from a realistic streak before judging the target. A good-looking ratio becomes useless when three losses cause the trader to abandon it.
Product, Course, App and Platform Experience
The ratio becomes useful when the order ticket makes every input visible.
Platform and app experience
A practical platform should show entry, stop, target, spread, and position size before submission. Bracket orders can attach the stop and target together. Mobile screens are convenient, but they can hide contract details and open risk.
Course and onboarding experience
Useful onboarding teaches the formula with long and short examples. It should also separate reward-to-risk wording from risk-to-reward wording. The notation matters less than using one convention consistently.
Product experience on a simulated account
Simulation lets a trader compare planned and executed ratios across many sessions without risking savings. When practice turns into a process, Pivex offers a structured evaluation with its terms stated up front. Simulation does not recreate the emotional weight of real capital.
Decision Framework: Is the Ratio Tradeable?
Use this framework before entry.
- Does the stop represent genuine invalidation?
- Does the target sit at a defensible market level?
- Does the ratio remain acceptable after spread and slippage?
- Does the historical win rate support the required break-even rate?
- Can the position size keep account risk fixed?
- Can the trader follow the planned exit without moving it?
Six clear answers support the setup. A missing stop or target means no ratio exists. A target chosen only to create 1:3 is decoration, not analysis.
Common mistakes include placing a stop where normal volatility will hit it, ignoring costs, and using maximum leverage. Others include changing the target after entry, comparing ratios across inconsistent notation, and assuming a high win rate guarantees profit.
Before committing capital, review goals, risk tolerance, and emergency savings. The SEC lists these considerations in its investor decision checklist.
What to Do After Calculating the Ratio
Record the setup before the order. Then record the actual fill, stop, exit, and result in R. After a meaningful sample, compare the average planned ratio with the average executed reward ratio.
If the gap is wide, change one execution rule. Do not move the target simply to improve the spreadsheet. Test whether the market reaches the original target often enough to support it.
A weekly review should separate setup quality from execution quality. Grade whether the stop and target matched the chart before checking the result. Then compare planned R with realised R across the same strategy, timeframe, and session. This exposes early exits, delayed entries, and oversized losses. It also shows whether costs are turning a thin positive idea into a negative process over time.
The risk reward ratio is most valuable as a filter. It removes trades whose potential cannot justify their planned loss. It cannot turn an unsupported target into an edge.
Before participating, review Pivex's current program rules and decide whether a simulated proprietary trading evaluation fits your experience and risk limits. Participation does not guarantee a reward, income, or any particular trading result.