Risk-Reward Ratio — Trading Wiki

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What Risk-Reward Ratio means

The risk-reward ratio compares a trade's planned loss with its planned gain. A 1:3 ratio means a planned $1 loss for a potential $3 gain; it does not guarantee those fills or establish a universal professional minimum.

In depth

The risk-reward ratio (R:R or RRR) is a measurement that compares the potential loss on a trade (from entry to stop loss) against the potential gain (from entry to take profit target). Expressed as a ratio like 1:2 or 1:3, it quantifies the trade's payoff structure before entry, enabling traders to make mathematically informed decisions about which trades are worth taking. A 1:2 risk-reward ratio means that for every dollar risked, two dollars of profit are targeted. A 1:3 ratio means three dollars of potential profit for each dollar of risk. A planned ratio describes selected entry and exit assumptions.

A break-even calculation requires realised payoff sizes and costs; the planned ratio alone does not determine profitability. For fixed realised payoffs before costs, a 1:1 ratio breaks even at 50% wins; profitability requires more than 50%. Planned exits do not ensure those realised payoffs. With fixed realized +2R/−1R before costs, the exact break-even rate is one third; profitability requires a higher rate. At 1:3 with fixed realised gains and losses, a win rate above 25% is required before costs; exactly 25% breaks even. Under stated fixed-payoff assumptions, expected value combines the frequency and size of gains and losses.

Costs and dependence also matter, and an estimate from one historical sample does not establish a future positive expectancy. A chosen planned payoff ratio is not a universal fund rule or evidence of positive realised expectancy. The calculation is straightforward: divide the distance to your take-profit target by the distance to your stop loss. If your stop loss is $5 below entry and your target is $15 above entry, the R:R is 1:3.

Key points

• Compares potential loss (stop loss) to potential gain (take profit)
• With fixed realized +3R/−1R before costs, 25% wins breaks even; profitability requires more
• A planned ratio is not a universal professional minimum or evidence of positive expectancy

Why it matters when you are learning

Calculate the planned ratio, then compare it with realised gains, losses and costs. A favorable planned ratio is not proof that the outcomes will match it.

Worked exercise and its limits

With fixed realized wins of +$3 and losses of −$1, a 25% win rate gives 0.25×3 − 0.75×1 = zero before costs. Adding any positive cost makes that result negative. Planned stops and targets do not establish realized amounts or win probabilities.