The risk reward ratio formula
The risk reward ratio (R:R) is the distance from your entry to your target divided by the distance from your entry to your stop:
R:R = |target − entry| ÷ |entry − stop|
Traders write it two ways. "1:3" puts risk first; "3R" or "3:1 reward to risk" puts reward first. They describe the same trade: for every 1 unit you risk, you aim to make 3. This guide uses the reward-first number, so a higher figure means more reward per unit of risk.
The ratio is a plan, set before you enter. Once the trade is closed, the result is measured in R-multiples, which tell you what you actually got.
A worked example
You plan a long trade in a stock at $50.00, with a stop at $48.00 and a target at $56.00.
- Risk per share: $50.00 − $48.00 = $2.00
- Reward per share: $56.00 − $50.00 = $6.00
- Risk reward ratio: $6.00 ÷ $2.00 = 3, written 1:3 or 3R
For a short trade the signs flip (the stop sits above the entry and the target below), but the formula with absolute values gives the same kind of answer.
You can check any setup in the risk reward calculator, which also shows the break-even win rate for the ratio you enter.
Break-even win rate for each ratio
A ratio on its own says nothing about whether a strategy works. It has to be read together with your win rate. The win rate at which a strategy breaks even (ignoring fees and slippage) is:
break-even win rate = 1 ÷ (1 + R:R)
| Reward to risk | Break-even win rate |
|---|---|
| 0.5 | 66.7% |
| 1 | 50.0% |
| 1.5 | 40.0% |
| 2 | 33.3% |
| 2.5 | 28.6% |
| 3 | 25.0% |
| 4 | 20.0% |
This assumes every winner reaches its target and every loser hits its stop exactly. Real trades rarely do, which is why the planned ratio and the realised ratio can be far apart. The win rate vs risk reward guide goes deeper into this trade-off.
Read the table from the other side too: if your journal shows a 35% win rate, you need a realised reward to risk above roughly 1.86 (because 1 ÷ (1 + 1.86) is about 35%) just to break even before costs.
Planned ratio vs the ratio you actually get
Most traders plan good ratios. Fewer achieve them. Common reasons the realised number drifts:
- Early exits. You take profit at 1.5R on a trade planned for 3R because the position felt uncomfortable.
- Moved stops. A stop widened mid-trade turns a planned 1R loss into a 1.6R loss.
- Slippage and gaps. Stops can fill worse than their price. See stop loss vs stop limit.
- Costs. Commissions and spreads shrink every winner and enlarge every loser.
The realised version of the ratio is the payoff ratio: payoff = avg win ÷ |avg loss|, measured over your closed trades. If you plan 1:3 and your journal shows a payoff of 1.4, the gap is the real finding.
Ratio, stop placement and position size work together
The ratio is often treated as a property of the chart alone, but it interacts with two other decisions: where the stop goes and how large the position is.
Moving the stop changes the ratio. In the example above, a stop at $49.00 instead of $48.00 halves the risk per share to $1.00 and doubles the ratio to 6 with the same target. That looks better on paper, but a closer stop is also more likely to be hit by ordinary price movement. A better-looking ratio bought with a worse stop is not an improvement unless your journal shows it.
Position size keeps the money at risk constant. If you size each trade with position size = (account × risk %) ÷ |entry − stop|, then a wider stop means fewer shares and a tighter stop means more, so a 1R loss costs about the same in money whatever the ratio. That is what lets you compare a 1:2 trade with a 1:4 trade fairly. The position sizing guide and the position size calculator cover the formula.
Targets need a reason. A target set only to reach a chosen ratio, with no level or rule behind it, tends to be reached less often than one based on your own setup rules. Logging whether each target was hit, missed or abandoned shows you which.
Put the ratio together with win rate: expectancy
The single number that combines ratio and win rate is expectancy, the average result per trade:
expectancy = WR × avg win + (1 − WR) × avg loss (with avg loss as a negative number)
Example: over 20 closed trades you won 8 (40%) at an average of +$300 and lost 12 at an average of −$100.
- Payoff ratio: $300 ÷ $100 = 3.0
- Expectancy: 0.40 × $300 + 0.60 × (−$100) = $120 − $60 = +$60 per trade
- Profit factor: $2,400 gross wins ÷ $1,200 gross losses = 2.0
Twenty trades is a small sample, so treat any figure like this as a starting estimate, not a verdict. The expectancy guide and the profit factor calculator cover both measures.
How to use the ratio without fooling yourself
- Set the stop from the chart or your rules first, then the target. Placing the stop wherever it makes the ratio look good gives you a stop that is easy to hit.
- Write the planned ratio down before entry. A ratio recorded after the fact tends to flatter you.
- Compare planned vs realised R on every closed trade. A column for each in your journal is enough.
- Review by setup. One setup may hold its ratio while another leaks. Averages across everything hide that.
- Include costs. On small targets, fees can be a large share of the reward.
A journal app that imports fills from your broker can fill these columns for you: TradeGreen connects read-only to 20+ brokers, journals each closed trade automatically and computes win rate, profit factor, R and expectancy per setup. A spreadsheet works too; the trading journal spreadsheet lists the columns and formulas.
What a "good" risk reward ratio is
There is no universal good ratio. A strategy with a 1:1 ratio and a 60% win rate and one with a 1:3 ratio and a 30% win rate can both have positive expectancy before costs. What matters is whether your realised ratio and your realised win rate, measured together over enough trades, produce a positive expectancy after fees. Higher ratios usually come with lower win rates and longer losing streaks, so the ratio you can actually follow is part of the answer.
This page is educational and is not a recommendation to use any particular ratio or strategy.