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Trading glossary
What Is the Risk Reward Ratio? Formula and Worked Example
The risk reward ratio compares how much you stand to gain with how much you stand to lose on a trade. For a long position it is the distance from entry to target divided by the distance from entry to stop. It describes a trade's shape, not its chance of success.
In brief
What is the risk reward ratio?
A risk reward ratio compares the planned gain with the planned loss on one trade. Here is the formula for long and short positions, a worked example tied to a fixed account risk, and what the ratio leaves out.
Key takeaways
- The risk reward ratio is reward divided by risk: the distance to your target divided by the distance to your stop, both measured from your entry price.
- The ratio describes the planned shape of a trade. It does not say how often the target or the stop will be reached.
- Position size links the ratio to a fixed account risk. Once the stop distance is known, the number of units follows.
- The breakeven win rate for a given ratio is 1 / (1 + R). It is arithmetic before costs, not a forecast or a target.
- Costs, slippage and gaps change the realised ratio, so the planned figure is a starting point rather than a result.
Risk reward ratio formula for long and short trades
The ratio needs two distances, both measured from your entry price. Reward is the distance to the target, the price at which you plan to take profit. Risk is the distance to the stop, the price at which you plan to exit at a loss. Both are per unit of the instrument. Traders often write the ratio as r/r or rr ratio. Take-profit orders and stop-loss orders set those prices with your broker or platform.
Formula
Long: reward = target - entry; risk = entry - stop; ratio = reward / risk. Short: reward = entry - target; risk = stop - entry; ratio = reward / risk. Write the ratio as reward to risk, such as 3:1, or as the single number 3.
Risk reward ratio worked example: a long trade
This is an Example, not a recommendation or a forecast. Suppose you buy at an entry of 100.00, with a stop at 98.00 and a target at 106.00. Reward is 106.00 - 100.00 = 6.00. Risk is 100.00 - 98.00 = 2.00. The ratio is 6.00 / 2.00 = 3, or 3:1.
Now tie the trade to a fixed account risk. Assume an account of US$10,000 and a plan to risk 1% on this trade, which is US$100. Each unit loses 2.00 if the stop is reached, before costs, so the position is 100 / 2.00 = 50 units. At the stop the planned loss is 50 x 2.00 = US$100. At the target the planned gain is 50 x 6.00 = US$300, again before costs.
The position size, not the ratio alone, decides the money at risk. The same 3:1 trade with a 1% account risk on a larger stop distance would use fewer units. Use the position size calculator to run the same arithmetic for your own account currency and instrument.
Breakeven win rate arithmetic: maths only
Suppose each trade ends either at the target or at the stop, and costs are ignored. Let R be the ratio, with the risk set to 1 unit and the reward set to R units. Then the expected result per trade is p x R - (1 - p) x 1, where p is the share of trades that reach the target. That expected result is zero when p = 1 / (1 + R).
This is a piece of arithmetic. It does not say what share of trades any trader wins, and it does not show that any ratio will be profitable. Real trades have costs, and real exits can differ from the planned levels.
- A 1:1 ratio (R = 1): 1 / (1 + 1) = 50%.
- A 2:1 ratio (R = 2): 1 / (1 + 2) = 33.3%.
- A 3:1 ratio (R = 3): 1 / (1 + 3) = 25%.
Read the table as the break-even point before costs under those assumptions. Spreads, commissions and financing charges move the break-even point up. Slippage and gaps can move it further.
The same arithmetic for a short trade
For a short, the target sits below the entry and the stop sits above it. Suppose you sell at 50.00, with a stop at 52.00 and a target at 44.00. Reward is 50.00 - 44.00 = 6.00. Risk is 52.00 - 50.00 = 2.00. The ratio is 3:1, the same as the long example, and the formula is reversed.
With the same US$10,000 account and a 1% risk of US$100, the position is 100 / 2.00 = 50 units. The planned loss at the stop is US$100 and the planned gain at the target is US$300, before costs. Check the side of the order before you submit it, because a sell and a buy are not interchangeable.
What the risk reward ratio does not show
The ratio is one input to a trade plan. The table lists what it leaves out, and where to read more before you rely on the number.
| Missing from the ratio | Why it matters | Where to read more |
|---|---|---|
| Probability | The ratio does not say how often the target or the stop is reached. A high ratio can still be reached rarely. | The break-even arithmetic above, which uses a win rate only as a formula. |
| Costs | Spread, commission and financing reduce the reward and add to the risk, so the realised ratio is lower than the planned one. | Your broker's or provider's published spread, commission and financing schedule. |
| Slippage and gaps | Once triggered, a stop can fill away from its planned price, so the realised loss can exceed the planned risk. | The stop-loss order guide linked in the formula section. |
| Position size | The ratio ignores how many units you trade. The money at risk depends on the units and the stop distance. | The position size calculator linked in the worked example. |
| Level quality | Targets and stops are inputs you choose. A 3:1 ratio on an arbitrary level is still arbitrary. | Risk management. |
The rows describe the ratio's limits. They do not estimate any probability or cost for a specific market.
Risk disclosure
- A planned ratio is not a result. A 3:1 plan can end at the stop, and a 3:1 target does not mean a 3:1 outcome.
- Fills may not match the planned price, so the realised ratio can differ from the planned one.
- Costs reduce the reward and increase the risk, so check them before you use the ratio in a plan.
- Leveraged and futures positions can produce losses larger than the amount you planned to commit. FINRA warns about margin, and the NFA warns about leverage in futures.
- This page is educational and is not personal financial advice. The worked numbers are illustrative only.
RTX5 status
RTX5 is Orrnn's trading terminal and broker-technology product. Its Windows desktop client is in preview, and the web and mobile clients are planned. A Google Play listing for Android is published, but the mobile client has no approved release record yet; check the product-availability record before relying on any RTX5 feature. The ratio and position-size examples on this page are illustrative and do not come from an RTX5 feature.
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Primary references
Sources were checked on 9 November 2026. They explain market rules and concepts; they do not certify RTX5 or provide individual financial advice.
FINRA: Frequent intraday trading: understanding the basicsSupports that frequent intraday trading, particularly on margin, carries risks including losing some or all of an investment, and that margin trading carries the potential to lose more than the original investment. Page dated 4 June 2026; checked 9 November 2026.NFA: Investor best practicesSupports that leverage in futures can make profit and loss swings wider than in most investments, and that you may need to cover losses above what you planned to commit. Checked 9 November 2026.RTX5 product availabilityRTX5 status record. Use it to check which RTX5 products and clients are live before relying on any feature.
Questions readers ask
What is a good risk reward ratio?
No single ratio is good for every trade. A ratio describes the planned reward and risk on one trade, but it does not say how often the target or stop will be reached, or what the costs are. Some traders use a minimum ratio as a plan rule, but that rule is a choice, not a measure of quality. Test any rule against your own records and costs before relying on it.
Does a higher risk reward ratio mean a better trade?
Not by itself. A higher ratio usually means a larger planned target relative to the stop, and that target may be reached less often. The ratio can look attractive while the trade has a poor chance of reaching the target. Read the ratio together with the probability of each outcome, the costs and the size of the loss in your account currency.
What win rate do I need for a given ratio?
Under simple assumptions, the break-even share of winning trades is 1 / (1 + R), where R is the ratio. A 2:1 ratio gives 33.3% and a 3:1 ratio gives 25%, before costs. This is arithmetic, not a prediction, and it does not show that any trader reaches that win rate. Costs and slippage raise the break-even point.
Is the risk reward ratio the same as position size?
No. The ratio compares the planned gain with the planned loss per unit. Position size sets how many units you trade, and that decides the money at risk in your account. A 3:1 ratio with a large position can risk more than a 1:1 ratio with a small one. Use a position size calculator to link the stop distance to a fixed account risk.
Does a stop loss guarantee the risk in my ratio?
No. A stop sets a planned exit, and the ratio uses only the planned prices. The realised loss and gain can differ from those figures, so the realised ratio can differ too. The stop-loss order guide linked above explains how stop orders trigger and fill, and you should check your broker's rules before you rely on the planned figure.
Keep learning
What is a stop-loss order?How a stop sets the risk side of the ratio, and why the fill can differ from the stop price.What is a take-profit order?How a target order sets the reward side of the ratio.Position size calculatorTurn a fixed account risk and a stop distance into a position size.Risk managementRTX5 risk management page. Check the product-availability record for the status of any feature it describes.