Trading glossary
The risk-reward ratio compares the potential loss of a trade to its potential gain. Learn how it is calculated and how traders use it in planning.
The risk-reward ratio expresses how much a trader stands to lose relative to how much they might gain on a position. It is usually written as a ratio such as 1 to 2, meaning the potential loss is one unit and the potential gain is two. Traders often estimate it before entering, using a planned entry, stop-loss, and target.
Risk is the distance from the entry price to the stop-loss, and reward is the distance from the entry to the target. Dividing the risk by the reward gives the ratio. For example, risking $100 to potentially make $300 is a 1 to 3 ratio. The figure is a plan based on chosen levels, not a prediction that either level will be reached.
A favorable ratio alone does not make a strategy sound, because outcomes also depend on how often trades reach their target. A high reward paired with a very low win rate can still lose money over time. Traders weigh the ratio alongside win rate and position sizing. This concept is educational, not advice, and trading carries the risk of loss of capital.
There is no universal answer. Many traders look for reward that exceeds risk, but the right balance depends on win rate and strategy. A favorable ratio alone does not ensure profitability.
Risk is the distance from entry to the stop-loss, and reward is the distance from entry to the target. The ratio compares these two planned distances before a trade is taken.
No. The ratio is only a plan based on chosen price levels. Whether either level is reached is uncertain, and outcomes also depend on how often trades succeed.