What Is the Risk/Reward Ratio?

The risk/reward ratio compares how much you stand to gain against how much you stand to lose. Entry at $100, stop at $95, target at $115 gives $5 of risk against $15 of reward — a 1:3 ratio.

On its own the ratio means nothing. What gives it meaning is the win rate it implies, and the relationship is exact: break-even win rate = 1 ÷ (1 + R). A 1:1 setup needs to win more than 50% of the time. A 1:3 setup needs only 25%. A 1:5 needs 16.7%.

This explains why high-R:R trading feels so unpleasant to execute. At 1:5 you are wrong more than eight times out of ten. Every instinct says the strategy is broken, and the only thing that tells you otherwise is arithmetic you have to trust through a long string of losses. Position sizing is what makes that survivable.

A high ratio is not automatically better, though. A 1:10 target that never fills is worth less than a 1:1.5 that fills reliably. The ratio only means something if the target is realistically reachable given the asset's volatility and your holding period — so measure how often your targets actually get hit before trusting a headline number.

Note also that the raw ratio excludes costs. Fees and funding push your true break-even further out, quietly lowering realised R below the planned figure — an effect that hits tight intraday setups hardest. The risk/reward calculator shows the required win rate and expectancy for any setup.