Skip to main content

Risk-to-Reward Ratio Explained

Risk-to-reward compares the amount a trade may lose with the amount it may gain at a planned target.

A structured trade plan connecting invalidation, entry, and target

The short answer

If a trade risks $100 to target $200, its planned reward-to-risk is 2:1, often described as +2R. The ratio matters only when the stop and target are realistic and the setup has a tested probability of reaching them.

What Is R?​

1R is the amount initially risked on a trade.

  • A full planned loss is approximately -1R.
  • A win equal to the original risk is +1R.
  • A win twice the original risk is +2R.

Using R makes trades with different account sizes and position quantities comparable.

Calculate Planned Reward-to-Risk​

For a long:

planned reward = target price - entry price

planned risk = entry price - stop price

Then:

reward-to-risk = planned reward ÷ planned risk

Use actual tradable prices and include expected costs.

A High Ratio Is Not Automatically Better​

A distant target may create an attractive ratio on paper but have a low probability of being reached.

The ratio becomes meaningful only when:

  • the target aligns with realistic structure;
  • the stop aligns with valid invalidation;
  • execution costs are included;
  • management rules are consistent;
  • results are measured across many trades.

Moving a target farther merely to display 3R does not improve the setup.

R Changes During Trade Management​

Partial exits, trailing stops, slippage, and discretionary decisions change realized R.

Track:

  • planned R;
  • maximum favorable and adverse movement;
  • realized R;
  • reasons for deviations from the plan.

This reveals whether management improves or damages results.

Reward-to-Risk and Win Rate Work Together​

A strategy can succeed with:

  • a lower win rate and larger average wins;
  • a higher win rate and smaller average wins.

Neither ratio nor win rate alone defines profitability. The combined concept is expectancy.

Use Structure for Realistic Targets​

Potential targets may include:

  • prior swing highs or lows;
  • range boundaries;
  • objective value or deviation areas;
  • areas where opposing liquidity may appear.

Grid and Levels can help map reference areas. They do not guarantee price will reach them.

Common Mistakes​

  • Rejecting every trade below an arbitrary ratio.
  • Using unrealistic targets to improve the displayed ratio.
  • placing an excessively tight stop;
  • ignoring win probability and execution costs;
  • comparing planned R with realized cash PnL inconsistently.

Key Takeaways​

  • R standardizes trade results relative to initial risk.
  • Reward-to-risk depends on realistic stops and targets.
  • A high ratio does not guarantee a high-quality setup.
  • Track planned and realized R separately.
  • Evaluate reward-to-risk together with win rate and expectancy.

Continue Learning​

Start Your 7-Day Free Trial
Risk notice

Targets and reward-to-risk estimates are hypothetical. Price may reverse, gap, or execute differently from the plan.