What Is the Risk/Reward Ratio and How Is It Calculated?
What is the risk/reward ratio?
It compares the potential loss you accept in a trade with the potential gain you aim for. With an entry of 100, a stop at 95 and a target of 115, risk is 5 and reward is 15, so the ratio is 1 to 3.
How is it calculated?
Reward = target − entry; risk = entry − stop (long side). Ratio = reward / risk. For short trades the signs are reversed.
Is the ratio enough on its own?
No. A high ratio is of little use if the target is unlikely to be reached. Win rate and ratio are judged together: with a 1 to 2 ratio, winning one trade in three is break-even.
Where do the levels come from?
The stop usually sits below a nearby support or an ATR-based distance, and the target at the next resistance. Levels should be scaled to the market's volatility.
Things to watch
Spread, commission and slippage increase the real risk. This page is educational, not investment advice.