A planned risk-to-reward ratio compares the distance to an exit that invalidates the trade with the distance to a profit target. It helps describe a setup, but the target is not a forecast and the stop is not a guaranteed maximum loss.

Calculate the Distances

For a long position, subtract stop from entry for planned risk and entry from target for planned reward. For a short position, use stop minus entry and entry minus target. Both amounts should be positive for the intended setup.

A hypothetical stock entry at $50, stop at $48 and target at $54 has $2 planned price risk and $4 planned reward per share: 1: 2 risk-to-reward. Shorting at 4,500 with a stop at 4,510 and target at 4,470 gives 10:30, or 1: 3, in price points. Derivatives also require the contract multiplier to convert points to money.

State your convention: some tools display reward divided by risk, calling the first example 2: 1. A bare "2" without a label is ambiguous.

Win Rate and Payoff Work Together

Assume each loser costs $100 and every winner has the stated payoff, with no fees or breakeven trades:

  • Seven $100 wins and three $100 losses produce +$400 over ten trades.
  • Four $300 wins and six $100 losses produce +$600 over ten trades.

These examples show how two ingredients combine. They do not establish which strategy is better or whether either can achieve those outcomes.

The breakeven win rate is average loss / (average win + average loss). A realised 2: 1 average win/loss ratio requires about 33.33% wins before costs. At exactly one-third, the gross result is zero; costs make it negative. A planned 1: 2 target does not establish the realised ratio.

Choose Targets That Can Be Evaluated

Prior price levels, a measured range or an ATR multiple can define a candidate target. Record the rule in advance and test the full entry and exit process. A target twice as far away can change the chance of reaching it and the time spent exposed.

Do not call a trade good just because its drawn target is distant. Nor is a payoff below 1: 1 automatically destructive: a sufficiently high realised win rate can offset smaller wins, though costs and occasional large losses still matter.

Managing the Trade Changes the Calculation

Moving a stop to the entry price does not make a trade free. Fees and execution beyond the trigger remain possible. FINRA explains why stop prices are not guaranteed execution prices.

Partial exits also change the realised payoff. If half a position exits at +1R and half at +3R, the combined result is +2R before costs, provided both outcomes occur. If the second half instead exits at −1R, the combined gross result is zero. Track the complete position, not just the best partial exit.

Frequently Asked Questions

What is a good ratio? There is no universal professional target. Evaluate realised net expectancy, drawdown and the reliability of the sample rather than selecting a minimum ratio alone.

Does a 1: 2 target help me pass an evaluation? It does not determine the losing sequence or protect a daily/trailing loss budget. Check the actual programme rules and remaining headroom independently.

Why record outcomes in R? Dividing each trade's net result by its initial planned dollar risk can make differently sized trades easier to compare. Preserve that original risk amount instead of redefining it after moving the stop.

Risk Disclaimer: Trading involves substantial risk of loss. Past performance is not indicative of future results. See our full risk disclaimer.