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Risk-reward ratio

Ratio of potential gain to potential loss on a trade — also written R-multiple.

The risk-reward ratio is the ratio of the distance from entry to take-profit (the reward leg) to the distance from entry to stop (the risk leg). A '2:1 RR' setup has a target twice as far as its stop. The reward leg expressed in units of risk is the 'R-multiple'.

Higher RR setups can be profitable even with a low win rate. Break-even win rate as a function of RR: win_rate_BE = 1 / (1 + RR). A 2:1 RR strategy breaks even at 33.3% wins; 3:1 breaks even at 25%.

RR alone says nothing about whether a trade is good — the probability of hitting target vs. stop matters at least as much. Use RR together with empirical win rate to compute expectancy, the real measure of edge.

Formule

RR = |TP − entry| / |entry − stop|
Break-even win rate = 1 / (1 + RR)

Exemple

Entry 50,000, stop 49,500, TP 51,000. RR = 1,000 / 500 = 2.0. Strategy needs >33.3% win rate to be profitable.

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Risk-reward calculator

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