What Is a Risk-to-Reward Ratio?
A risk-to-reward ratio compares the loss distance to the intended gain distance. It summarizes the planned price geometry of a trade without claiming that either exit is likely.In this guide
- Calculate price distances
- Find the simplified break-even win rate
- Do not confuse a target with an edge
Calculate price distances
For a buy at 100 with stop 95 and target 110, risk distance is 5 and reward distance is 10. Reward divided by risk is 2, commonly written as 1:2 risk-to-reward. For a sell, the stop must instead lie above entry and the target below it.
Find the simplified break-even win rate
Assuming every loss is one risk unit and every win is two, break-even before costs is 1 ÷ (1 + 2) = 33.33%. With one unit risk and one unit reward, it is 50%. Costs raise the required win rate when all other assumptions stay the same.
Do not confuse a target with an edge
A distant target creates a larger mathematical ratio, but does not establish the probability of reaching it. Partial exits, trailing stops, slippage and variable losses alter realized outcomes. Optional size in this calculator is underlying units, not lots. Multiply lots by contract size before entering units if you want gross monetary scenario results.
Use a consistent ratio convention
Write risk:reward explicitly. Risking $100 for a modeled $200 reward is 1:2, or a reward multiple of 2R. Some interfaces display the inverse, so a bare value of 2 can be ambiguous. The amounts must use the same currency and comparable treatment of costs.
Connect the ratio to a hypothetical break-even rate
With identical $100 losses and $200 wins, zero costs and no other outcomes, one win offsets two losses. The break-even win proportion is 100 ÷ (100 + 200), or one third. This is an arithmetic condition, not a predicted win rate. Costs raise the required rate, while variable wins and losses require their actual averages.
Does a distant target make a better trade?
A larger target raises the modeled payoff but does not show the probability of reaching it. A ratio calculator cannot evaluate a strategy, forecast price movement or account for changing exits. Compare planned and realized outcomes separately before drawing conclusions about performance.
Try the related calculator with your own inputs and review its assumptions.
Further reading: Calculation methodology and related guides.
Educational information, not personalized investment advice. Verify broker rules and contract specifications.