Home Glossary Risk-reward ratio
Risk-reward ratio
Risk-reward ratio — How far your target sits from entry compared with how far your stop does — the other half of the win-rate question.
A win rate on its own is not a measure of anything, and neither is a reward-to-risk. Together they decide whether a strategy makes money, and the relationship between them is fixed arithmetic that settles a great many arguments.
In plain English
Measure the distance from your entry to your stop — that is the risk. Measure the distance from your entry to your target — that is the reward. The ratio between them is written 2:1 or simply 2R, and it describes what the trade is designed to pay if it works.
Its importance comes from a single formula: a plan of R breaks even at a win rate of 1 ÷ (1 + R). At 1R you must win half. At 2R you need one in three. At 3R, one in four. This is why "my win rate is only 40%" is not a diagnosis — at 2R, 40% is comfortably profitable, and at 0.5R, 60% loses money.
The trap is that reward-to-risk and win rate are not independent. Moving your target further out raises the ratio and lowers the hit rate, because price reaches distant levels less often. A plan of 5R looks unbeatable on paper — it needs only a 17% win rate — right up until you discover that it delivers 12%.
The formula
R = |target − entry| ÷ |entry − stop| Break-even win rate = 1 ÷ (1 + R) With a round-trip cost c in R: (1 + c) ÷ (1 + R)
- Planned R uses your intended target. Realised R uses where you actually got out, and the two are rarely the same number.
- The cost term is the one nobody includes, and at tight ratios it dominates: a 0.1R cost moves the break-even line by five points at 1R and by less than three at 3R.
Every figure here assumes losses cost exactly 1R. If your stops slip, or get widened in the moment, your real average loss is more than 1R and every break-even line moves up invisibly.
Worked example — the demo account
A long at 1.1000 with a stop at 1.0950 and a target at 1.1150 — the standard shape.
| Risk | 50 points | 1.1000 − 1.0950 |
|---|---|---|
| Reward | 150 points | 1.1150 − 1.1000 |
| Reward-to-risk | 3.00 : 1 | |
| Break-even win rate | 25.0% | 1 ÷ (1 + 3) |
| With 0.1R of costs | 27.5% |
A 3R plan needs to work one time in four to stand still — and one time in 3.6 once costs are included.
The demo account gives the realised version of the same idea. Its average win is $238.63 against an average loss of $157.44, a payoff ratio of 1.52. At that ratio the break-even win rate is about 39.7%, and the account won 51.04% of the time — profitable, and by a smaller margin than the headline win rate suggests.
Note that the realised 1.52 is well below a 3R plan. That gap between the plan and the outcome is where most strategies actually live, and it is measurable rather than a matter of opinion.
Every figure above is from the demo account TapeSheet ships with — 96 closed trades, generated from a fixed seed. Open the same account →
What this does not tell you
The caveat is the part worth reading. Most tools put it in a footer, if they print it at all.
- Nothing about whether the target is reachable. Any ratio can be manufactured by moving the target further away, and doing so lowers the win rate by exactly enough to make it worse. The ratio is only meaningful alongside the hit rate it actually achieves.
- Nothing about what you actually did. Planned reward-to-risk describes an intention. If you habitually take profit at half target, your realised ratio is half your planned one and every break-even calculation you have done is wrong.
- Nothing about costs, unless you put them in. Spread and commission come out of the reward and are added to the risk, which hurts tight ratios disproportionately.
- Nothing about scaling out. A plan that takes thirds at 1R, 2R and 3R has an average realised ratio around 2R, not 3R. Using the furthest target in the arithmetic flatters the strategy by a wide margin.
Where TapeSheet shows it
Not shown as a planned figure, because a statement does not record your target. What is shown is the realised version — the average win to average loss tile on the Overview — and per-trade R once you enter the planned risk in a trade’s journal panel.
Questions
Is 1:2 the minimum I should take?
No. That rule is repeated everywhere and it is arbitrary. A strategy hitting 70% at 1:1 makes money comfortably; one hitting 20% at 1:3 does not. The pairing is what matters, and any rule that fixes one number without reference to the other will reject perfectly good strategies and approve bad ones.
Why is my realised ratio lower than my planned one?
Almost always because winners get closed early and losers occasionally run past the stop. Both compress the ratio from opposite ends. This is measurable rather than mysterious: compare your average win against your average loss and read it beside what your plan intended.
Should I move my stop to breakeven?
It is genuinely a trade-off, not an obvious improvement. Moving to breakeven cuts the left tail — good — and also converts trades that would have recovered into scratches, which lowers the win rate and the average win together. Whether it helps depends on your instrument and your entry timing, and it is exactly the kind of question a journal answers and an opinion does not.
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