Risk-Reward Ratio
The ratio of potential profit to potential loss on a single trade. A 1:2 R:R means you risk $1 to make $2.
Formula
Risk-Reward Ratio = (Target − Entry) / (Entry − Stop)
Risk-reward ratio compares how much you stand to lose (distance from entry to stop) against how much you stand to gain (distance from entry to target). It is the foundation of every trade decision.
A ratio of 1:2 means that even if you win only half your trades, you still come out ahead. Most professional traders refuse setups below 1:1.5, and many target 1:2 or higher.
R:R does not work in isolation — a 1:3 setup with a 20% win rate destroys capital. Always pair it with win rate to calculate expectancy.
Example
You buy at $100, stop at $98, target at $104. Risk = $2, Reward = $4 → R:R = 1:2. For every dollar risked you expect two back.
Related Terms
Asymmetric Risk
A trade or strategy where the potential reward significantly outweighs the potential loss — the core of every high-quality setup.
IntermediateBreak-Even
The price at which a trade neither profits nor loses — or the point at which a stop is moved to entry cost after partial gains.
BeginnerExpectancy
The average dollar amount you expect to make per dollar risked, calculated from your win rate and average win/loss sizes.
IntermediatePosition Sizing
Calculating exactly how many shares, contracts, or lots to trade so that a stop-out costs no more than your chosen risk percentage.
BeginnerR-Multiple
A trade's result expressed as a multiple of initial risk. A trade that earns 2× the amount risked is a +2R winner.
IntermediateSortino Ratio
A Sharpe variant that divides excess return only by downside deviation, ignoring upside volatility as a "risk".
AdvancedStop-Loss
A pre-set price level at which a losing trade is closed to cap the damage before it grows larger.
BeginnerTake-Profit
A target price at which a winning trade is automatically closed to lock in gains before a reversal can erode them.
BeginnerWin Rate
The percentage of trades that close at a profit. High win rate does not guarantee profitability without a favourable risk-reward ratio.
Beginner