Risk-Reward Ratio

The risk-reward ratio compares how much you expect to gain on a trade against how much you're risking to get it. A 1:3 ratio means you're risking $1 to make $3.

Entry, stop-loss, and target fix it the moment you place a trade, which makes it one of the few trading variables you fully control before the market moves.

Risk-Reward = (Target − Entry) ÷ (Entry − Stop)   (for a long)
Break-even Win Rate = 1 ÷ (1 + R)

Measure the distance from entry to your stop-loss (the risk) and from entry to your target (the reward), then divide. The ratio also implies a break-even win rate, the minimum win rate that keeps you flat, where R is the reward multiple.

Example

You long BTC at $100, set a stop at $96, and a target at $112. Risk is 100 − 96 = $4; reward is 112 − 100 = $12. The ratio is 12 ÷ 4 = 1:3. At 1:3 your break-even win rate is 1 ÷ (1 + 3) = 25%, so you only need to be right one trade in four to avoid losing money.

Where it fits

A favourable risk-reward ratio lets you stay profitable while losing most of your trades. Paired with win rate it produces expectancy, the number that actually determines whether you grow. Watch for the catch, though: your planned ratio and your achieved ratio drift apart once you move stops or take profit early. Logging both per trade is how you catch the leak.

Risk-Reward Ratio

Example

Where it fits

Related Terms

TMM records your planned vs achieved risk-reward on every trade.