Find the risk-to-reward ratio of a trade from your entry, stop-loss, and target price.
Risk = Entry − Stop-loss. Reward = Target − Entry. Ratio = Reward ÷ Risk. Most traders look for at least 1:2 (risking 1 to make 2) or better.
Educational tool only — not investment advice. Markets involve risk; past performance and illustrative math don't guarantee future results.
Risk/reward ratio compares how much is at stake on a trade against how much stands to be gained — a trade risking $100 to potentially make $300 has a 1:3 risk/reward ratio. It's a genuinely useful, simple number, but it's incomplete on its own: a favorable ratio doesn't automatically make a strategy profitable, because the ratio says nothing about how often the trade actually wins. A strategy with a very attractive 1:5 risk/reward ratio that only wins 15% of the time can still lose money overall, while a strategy with a modest 1:1 ratio that wins 60% of the time can be solidly profitable — the two numbers have to be evaluated together, never separately.
The number that connects them is expectancy: (win rate × average win) − (loss rate × average loss). A positive expectancy means the strategy is mathematically profitable over enough trades, regardless of whether any single ratio looks impressive in isolation. This is exactly why risk/reward ratio should be treated as one half of a two-part question — a trader targeting a 1:3 ratio needs to know, even roughly, what win rate that setup has historically produced, because a beautiful risk/reward ratio paired with an unrealistically low actual win rate is a recipe for a strategy that looks great on paper and loses money in practice.
It compares potential loss against potential gain on a trade: Risk/Reward = Amount at Risk ÷ Potential Profit. A trade risking $100 to potentially gain $300 has a 1:3 risk/reward ratio — meaning the potential reward is three times the risk taken.
No — risk/reward ratio says nothing about how often a trade actually wins. A strategy with an attractive 1:5 ratio but only a 15% win rate can still lose money overall, while a modest 1:1 ratio strategy with a 60% win rate can be solidly profitable. The ratio needs to be evaluated together with win rate, never in isolation.
Expectancy = (Win Rate × Average Win) − (Loss Rate × Average Loss). It combines both win rate and risk/reward into a single number showing whether a strategy is mathematically profitable over many trades. A positive expectancy is what actually determines long-run profitability, not the risk/reward ratio by itself.
There's no universal number — the right ratio depends on the actual win rate your specific strategy produces. A lower risk/reward ratio (like 1:1) can work fine with a high win rate, while a strategy with a lower win rate needs a higher risk/reward ratio to remain profitable. The two should always be considered together, informed by real historical results rather than a target picked in isolation.