Risk reward ratio

Risk is the amount lost if the stop is hit. Reward is the amount made if the target is hit. The ratio puts the two side by side: 1:3 means the trade risks 1 to make 3.

The ratio says nothing about how likely the target is. It only describes the plan. A trade with a ratio of 1:10 and a target price never reaches is worse than a modest 1:1.5 trade that works often.

• Risk = entry price – stop price for a long trade, stop price – entry price for a short.
• Reward = target price – entry price for a long trade, entry price – target price for a short.
• Ratio = risk : reward. Divide both sides by the risk to get the form 1:N.
• Add costs: fees and spread reduce the reward and increase the risk, which matters most for small targets.

• Long – entry 100, stop 96, target 112. Risk is 4, reward is 12, the ratio is 1:3.
• Short – entry 2,500, stop 2,550, target 2,400. Risk is 50, reward is 100, the ratio is 1:2.
• In money – with a position of 50 units in the first example a stop costs 200 and the target brings 600.
• A poor plan – entry 100, stop 90, target 105. Risk is 10, reward is 5, the ratio is 2:1: one loss cancels two wins.

The break-even win rate is the share of winning trades at which the result is zero before costs. The formula is risk / (risk + reward).

• 2:1 (risk 2 to make 1) – 66.7%
• 1:1 – 50%
• 1:1.5 – 40%
• 1:2 – 33.3%
• 1:3 – 25%
• 1:4 – 20%
• 1:5 – 16.7%

On Charts two rectangles – one from the entry to the stop, one from the entry to the target – show the ratio on the chart, and Replay mode lets you check how such plans played out on history.

• Stop first – place the stop where the idea is wrong: beyond a swing or a support or resistance level. Do not move it closer to improve the ratio.
• Target second – set it at the next level where price is likely to react, not at a round multiple of the risk.
• Then decide – if the ratio from these two real levels is below your minimum, skip the trade.
• Position size – choose the size so that a stop costs a fixed share of the account, for example 1%.

• Looking at the ratio without the win rate – a high ratio with a low win rate can still lose.
• Tightening the stop to make the numbers look better – the ratio improves and the win rate falls.
• Setting targets where price has no reason to go – the reward exists only on paper.
• Closing winners early – taking profit at half the target turns a 1:3 plan into 1:1.5 and changes the break-even win rate from 25% to 40%.
• Forgetting fees and funding – on short-term trades they take a visible part of the reward.