The risk reward ratio compares what a trade could lose if the stop is hit with what it could make if the target is reached. With the risk reward ratio explained properly, you can work out before entering how often a setup must win just to break even, which turns a hopeful idea into a measured plan.
Quick answer: how do you calculate risk reward ratio?
Measure the distance from entry to stop loss (the risk) and from entry to target (the reward). Divide reward by risk. A 40-pip stop and a 100-pip target give 2.5 to 1. The win rate needed to break even, before costs, is 1 ÷ (1 + 2.5), or about 28.6%.
What the risk reward ratio measures
Every planned trade has three prices: entry, stop loss and target. The ratio describes the relationship between the two distances those prices create, not the money involved.
That makes it independent of position size. A 40-pip stop and a 100-pip target give the same ratio whether you risk £10 or £100, because size scales both sides equally.
A note on notation
Traders write the same idea two ways. “1:2” usually means risking 1 to make 2, while “2:1 reward-to-risk” means the same thing the other way round. In this article we use R for reward divided by risk, so a trade that aims to make twice what it risks is 2R.
How to calculate risk reward, step by step
- Find the stop first. Put it where the trade idea is wrong, beyond the swing or zone, as explained in our guide to where to place a stop loss with price action.
- Find the target from the chart. Use the next opposing level, not a multiple you would like; our guide on targets and exit rules for taking profit covers this.
- Measure both distances in pips or points from the entry price.
- Divide reward by risk. That is your planned R.
- Size the position from the stop distance, so the loss at the stop equals your fixed risk; see how to calculate position size.
The order matters. If you pick the ratio first and then stretch the target or squeeze the stop to fit it, the numbers look good but stop describing the market.
The break-even win rate formula
Once you know R, you can work out the win rate at which the trade breaks even over many repetitions. Before costs, the break-even win rate is 1 ÷ (1 + R).
| Reward-to-risk (R) | Calculation | Break-even win rate |
|---|---|---|
| 0.5R | 1 ÷ 1.5 | About 66.7% |
| 1R | 1 ÷ 2 | 50% |
| 1.5R | 1 ÷ 2.5 | 40% |
| 2R | 1 ÷ 3 | About 33.3% |
| 2.5R | 1 ÷ 3.5 | About 28.6% |
| 3R | 1 ÷ 4 | 25% |
| 4R | 1 ÷ 5 | 20% |
A higher ratio lowers the bar, but it does not lower it for free: distant targets are reached less often. Our article on why win percentages are irrelevant on their own shows how win rate and ratio only make sense together, and expectancy in trading turns both into one number.
How costs change the ratio
The table ignores costs, and real trades never do. The spread is paid on every trade, win or lose, so it makes losses slightly bigger and wins slightly smaller.
Example: a planned 30-pip stop and 60-pip target is 2R on the chart. With a 2-pip spread, the loss becomes about 32 pips and the win about 58 pips, so the real ratio is roughly 1.81R and break-even rises from 33.3% to about 35.6%.
- Spread: matters most on tight stops; see bid, ask and the cost of the spread.
- Slippage: stops can fill worse than their level in fast markets, as our guide to why fills differ from your price explains.
- Funding: overnight charges on spread bets and CFDs eat into trades held for days.
Planned ratio vs realised ratio
The ratio you plan is not the ratio you get. What counts is the average win divided by the average loss across your closed trades, and that is where behaviour comes in.
A study in the Financial Analysts Journal, Are Professional Traders Too Slow to Realize Their Losses?, found that a US proprietary trading team held losing trades too long and sold winners too soon, which cut their profitability. The authors’ intraday analysis suggested that holding winners longer and cutting losers sooner would have helped.
That pattern quietly shrinks R. Closing winners at the first sign of a pullback and moving stops further away both drag the realised ratio below the plan.
Worked example: planning one trade, then ten
All figures are hypothetical. On a £5,000 account we risk 1% per trade, which is £50. A currency pair has pulled back to a demand zone, and there is clear room to the next supply level, which is the price-position test in our guide to whether a trade is worth the risk.
- Entry: buy at 1.2650.
- Stop: 1.2610, below the zone, so 40 pips. At £1.25 per pip, the loss at the stop is £50.
- Target: 1.2750, just below the supply level, so 100 pips, or £125.
- Ratio: 100 ÷ 40 = 2.5R, with a break-even win rate of about 28.6% before costs.
Now repeat that plan ten times with four winners. At the planned 2.5R the result is 4 × £125 minus 6 × £50, or +£200. If fear makes you close every winner at +40 pips, each win is only £50, and the same ten trades finish at −£100.
Spread bets and CFDs are leveraged, so a gap through the stop could turn any one of those £50 losses into more. Our guide to how much to risk per trade covers keeping that fixed amount small.
Common mistakes with risk reward
- Choosing the ratio before the levels. A 3R target beyond a strong opposing level is a wish, not a plan.
- Squeezing the stop to improve R. A stop inside normal noise gets hit more often, so the higher ratio is paid for with a lower win rate.
- Ignoring costs on short trades. On a 10-pip stop, a 2-pip spread changes the ratio a lot.
- Measuring only the plan. Track realised R in your journal; it is the number that matters.
- Using one minimum for every setup. The ratio you need depends on how often that setup wins in your records.
Frequently asked questions
What is a good risk reward ratio?
There is no single good number; it depends on your win rate. Many price action traders look for at least 1.5R to 2R, because that leaves room for costs and for the losing runs every method has.
Is a 1:1 risk reward ratio bad?
Not by itself, but it needs a win rate above 50% after costs to make money. That is hard to sustain, so most traders using 1R need a very consistent setup.
Should the spread be included in the calculation?
Yes, especially on tight stops. Add the spread to the risk and take it off the reward, then recalculate the break-even win rate.
Can you be profitable with a ratio below 1?
It is possible with a high enough win rate: at 0.5R you need to win more than about two trades in three. The danger is that a few large losses erase many small wins.
Next steps
The ratio is one part of a wider risk plan, so read our pillar on building a rules-based risk model next.
Assessing price position and building a rules-based risk model are both part of our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
