Risk/Reward Ratio Explained (With Examples)
The risk/reward ratio is one of the simplest, most powerful ideas in trading. It compares what you stand to gain against what you're risking — and it explains why some traders profit while winning fewer than half their trades.
How to calculate it
Risk is the distance from your entry to your stop-loss. Reward is the distance from your entry to your target. Divide reward by risk:
Reward = |Target − Entry|
Ratio = Reward ÷ Risk
Entry $60,000, stop $58,000, target $66,000 → risk $2,000, reward $6,000, ratio 3:1.
What's a good ratio?
Many traders won't take a trade below 2:1. The higher the reward relative to risk, the fewer trades you need to win to come out ahead.
The break-even win rate
This is the magic part. At a given ratio, there's a minimum win rate just to break even:
At 3:1 you can be wrong three times out of four and still not lose money. That's why pros obsess over risk/reward, not just being "right."
Enter your entry, stop and target to get the ratio and break-even win rate.
Open the risk/reward calculator →
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