A reward-to-risk ratio compares what a trade could make with what it could lose. It is one of the most quoted numbers in trading and one of the most misunderstood, because on its own it says nothing about how likely either outcome is.
The ratio
Take a stock bought at $42.50, with a stop at $39.80 and a target of $48.00.
- Risk: 42.50 − 39.80 = $2.70 a share
- Reward: 48.00 − 42.50 = $5.50 a share
- Reward to risk: 5.50 ÷ 2.70 = 2.04 : 1
R-multiples
Traders often measure results in units of the initial risk, called R. Here 1R is $2.70 a share. Reaching the target is a +2.04R result; being stopped out is −1R. Measuring in R lets you compare trades of different sizes and prices, and is how most trading journals summarise results.
Every ratio implies a break-even win rate
If you took this trade many times, how often would it need to work for you not to lose money overall? The answer is:
Break-even win rate = risk ÷ (risk + reward)
Here 2.70 ÷ (2.70 + 5.50) = 32.9%. Win more often than about one time in three and the trades make money on average; win less and they lose.
| Reward to risk | Win rate needed to break even |
|---|---|
| 0.5 : 1 | 66.7% |
| 1 : 1 | 50.0% |
| 2 : 1 | 33.3% |
| 3 : 1 | 25.0% |
This is why a high ratio isn't automatically good. A target five times further away than the stop gives a lovely 5 : 1 ratio, but if the price only gets there one time in ten, it loses money. Moving a target further out improves the ratio and usually lowers the win rate at the same time.
Fees change both sides
With 200 shares and $9.50 brokerage each way ($19 a round trip):
- Net loss at the stop: 200 × 2.70 + 19 = $559
- Net profit at the target: 200 × 5.50 − 19 = $1,081
- Net ratio: 1,081 ÷ 559 = 1.93 : 1
- Win rate needed after fees: 559 ÷ (559 + 1,081) = 34.1%
Fees make the loss bigger and the profit smaller, so they always push the break-even win rate up. On small positions the effect can be large: with 20 shares instead of 200, the net ratio here falls to about 1.25 : 1.
The break-even price after fees is the exit price that just covers them: (200 × 42.50 + 19) ÷ 200 = $42.60.
Expected value
If you have an honest estimate of how often a type of trade works (from a journal of past trades, not a hunch), you can estimate its average result:
Expected result = win rate × net profit − loss rate × net loss
At a 40% win rate: 0.40 × 1,081 − 0.60 × 559 = $97 a trade, or about +0.17R. At a 30% win rate the same trade averages −$67.
Small changes in win rate matter a lot near the break-even point, which is why estimates based on a handful of trades are unreliable.
Partial exits
Selling part of a position at a first target and the rest further out changes the average result. Locking in a profit early lowers the reward on the shares you sold but can raise the win rate, because some trades that would later have been stopped out still finish ahead. The take-profit planner shows each path, including what happens if the stop is hit after each exit.
What the ratio can't tell you
- Probability. The ratio is arithmetic; the win rate comes from evidence.
- Fills. Stops can fill worse than their price after a gap, and limit orders at a target may not fill at all.
- Opportunity cost. A trade that ties up money for months to make 2R is different from one that does it in a week.
Use the ratio to check that a trade's possible reward justifies its risk, and the break-even win rate to ask whether you have a realistic reason to expect better than that.