Risk-reward ratio
Also called: Risk/reward, R:R, RR ratio, Reward-to-risk, 1R, Risk ödül oranı
The risk-reward ratio compares what you risk down to your stop with what you expect to make up to a realistic target.
4 min read · one puzzle on the page
What the ratio tells you
Before a trade you know two distances: entry to stop and entry to target. The distance to the stop is your risk, called 1R. The target is measured in how many R away it sits. A stop 20 dollars away and a target 60 dollars away gives 1:3. Some write it as 3:1; same meaning, as long as you know which side is the risk.
The ratio sets how often you need to be right. The break-even win rate is 1 / (1 + RR). At 1:1 you need to win half your trades, at 1:2 about a third, at 1:3 a quarter. Spread and commission push that bar a little higher.
So a low win rate survives only with a high ratio, and a high win rate can live with a lower one. The two only mean something together.
Measuring R on a chart
Stop first: where the idea is invalid. Buying at support, that is a little below support and the last wick, and that distance is 1R. Then the target: the next level where price can genuinely stall, like the top of the range or the previous high.
The ratio depends on location. Buy at the bottom of a range and the stop is close while the top is far. Buy in the middle and the stop still has to go below the bottom, while the target is only halfway. That is why the middle of a range is a place to wait.
Example: BTC is swinging between 60,000 and 64,000. Buy at 60,400, stop 59,600, target 63,800: risk 800, reward 3,400, close to 1:4. Same stop, buy at 62,000: risk 2,400, reward 1,800, worse than 1:1.
Be just as honest with the target. Price often turns a little before the edge of a range. Placing the target slightly in front of the level lowers the ratio a bit but makes it real.
Try it on a chart
This chart shows a wide range with price in the middle. Before deciding, measure where your stop and target would land if you entered, and how many R that trade would be worth.
Price is right in the middle of a wide range; you're far from both levels. What do you do?
No sign-up needed. Make your call; when the chart opens you'll see why.
Ways to fool yourself with the ratio
The most common is drawing the target to hit the ratio. You want 1:3, the stop is 30 pips, so the target goes 90 pips away, with two resistance levels in between. It looks great on paper and price turns at the first one. A target should be a level, not a multiplication.
Second, tightening the stop to improve the ratio. Pull it inside the structure and R shrinks, the ratio grows, and ordinary noise stops you out. The stop's location comes from the chart, not from the ratio you want.
Third, looking at the ratio alone. A 1:5 setup that rarely works can be worse than a 1:1.5 setup that works often. Expectancy measures this: win rate times average win, minus loss rate times average loss. For example, a 40 percent win rate with 2R average wins and 1R losses gives 0.4 × 2 − 0.6 × 1 = 0.2R, a fifth of your risk per trade on average. If the result is below zero, the system loses money whatever the ratio.
What the ratio cannot tell you
A ratio is a plan, not an outcome. It says nothing about whether price hits the stop or the target first. One 1:3 trade guarantees nothing; the ratio only shows its meaning over many trades.
Spread and slippage distort small stops. With a 5 pip stop, a 1 pip spread is a fifth of your risk, and a paper 1:3 becomes worse than 1:2.5.
Nor does it account for time. Reaching a 1:3 target inside a range can take days, and by then news and new levels may have changed the picture.
And a ratio without your win rate is half a calculation. The formula gives you the bar. Only your own trade records tell you whether you clear it.
Frequently asked questions
How do you calculate the risk-reward ratio?
Measure the distance from entry to stop and from entry to target, then divide the second by the first. Entry 1.0850, stop 1.0830 and target 1.0910 give 20 pips of risk and 60 of reward, so 1:3. The stop should sit at the structure that invalidates the idea and the target at a real level where price can stall, or the number means nothing.
What win rate do you need with a 1:2 risk-reward?
The break-even win rate is 1 / (1 + RR). At 1:2 that is one third, about 33 percent: win one trade in three and you roughly break even before costs. At 1:1 you need 50 percent, at 1:3 25 percent. The formula only gives the threshold; your own trade records show whether your win rate is actually above it.
What does 1R mean in trading?
1R is the distance between your entry and your stop, the amount you accept losing on a trade before you take it. If you risk 1 percent of the account, 1R is that amount of money. Wins and losses are measured in this unit, so a 2R win means you made twice what you risked, and trades with different stop sizes become comparable.
