What the ratio measures
Every trade has a distance to the stop and a distance to the target. The ratio puts them side by side. Risk is how far price must move against you before the stop-loss closes the trade. Reward is how far price must move for you to reach your target.
The formula
Risk = |entry - stop| Reward = |target - entry| Risk to reward = reward / riskExample. Entry at $100 and a stop at $95 and a target at $110. Risk is $5 and reward is $10. The ratio is 1 to 2. You stand to make twice what you risk.
Ratio and win rate work together
A ratio alone does not tell you whether a plan works. You also need to know how often you win. The share of trades you must win to break even is 1 divided by 1 plus the ratio.
| Risk to reward | Win rate to break even |
|---|---|
| 1 : 1 | 50% |
| 1 : 2 | 33.3% |
| 1 : 3 | 25% |
| 1 : 4 | 20% |
These figures ignore fees and slippage. Add costs and the win rate you need goes up. A higher ratio lowers the win rate you need but it also usually makes the target harder to reach.
How to choose targets
Start from the chart and not from the number. Put the stop where the idea is wrong. Put the target at a level where price has reacted before. See support and resistance. Then read the ratio that falls out. If it is too low for your plan then skip the trade or wait for a better entry. Do not stretch the target just to make the ratio look good.
Use it before you enter
Check the ratio before you click and not after. Many traders set a minimum such as 1 to 2 and pass on anything below it. The risk reward calculator works out the ratio and the break-even win rate and the expectancy from your own numbers. It also shows how a losing streak affects your account.
Ratio is not position size
The ratio says nothing about how much you buy. Position size comes from your account and your risk percentage and your stop distance. Use the position size calculator for that. Then record the trade in the trading journal template and log the result in R so you can see your real average.
Common mistakes
- Chasing a big ratio. A far target may rarely fill.
- Moving the stop. Widen it after entry and the real ratio is worse than the one you planned.
- Ignoring costs. Fees and slippage eat into the reward and add to the risk.
- Reading the ratio as a forecast. It describes a plan and does not predict a result.
Frequently asked questions
What is a good risk-reward ratio?
There is no single good number. It depends on how often you win. A 1 to 2 ratio needs a win rate near 33% to break even before costs. A 1 to 1 ratio needs 50%.
How do I calculate the risk-reward ratio?
Divide the distance from entry to target by the distance from entry to stop. Entry 100 and stop 95 and target 110 gives 10 divided by 5 or a ratio of 1 to 2.
Does a higher ratio mean a better trade?
Not by itself. A higher ratio lowers the win rate you need but a distant target is less likely to be reached. Judge the ratio together with the chart and your results.
Related terms
Put it into practice
Written by CCF. CCF was founded by Joshua Montoya and Marty Cooney as equal co-founders. Last updated November 3, 2026.
Educational content only. CCF provides general education about digital assets, trading and investing. This entry explains a concept and does not suggest any trade. It is not individualized financial, investment, legal or tax advice and CCF does not guarantee any outcome or return.