The risk/reward ratio measures how much a trade stands to gain relative to what it stands to lose. It is set before entry, from three prices: the entry, the stop-loss and the take-profit. It says nothing about the probability of either outcome, which is why it is always read together with win rate.
How it’s calculated
- Risk = |entry − stop|
- Reward = |target − entry|
- Risk/reward = risk : reward, usually normalised so risk = 1
The breakeven win rate for a given ratio is 1 ÷ (1 + reward/risk), before fees. At 1:1 you need to win 50% of trades to break even; at 1:2, about 33%; at 1:3, 25%.
Example
You plan to buy a stock at $50.00 after a bull flag breakout. The stop goes below the flag at $48.50, and the measured target is $54.50.
- Risk = 50.00 − 48.50 = $1.50 per share
- Reward = 54.50 − 50.00 = $4.50 per share
- Ratio = 1.50 : 4.50 = 1:3
At 1:3, the setup breaks even if it works one time in four. If you risk $150 on it, the position size is 100 shares, and a full win would return about $450 before costs. The risk/reward calculator runs these numbers instantly.
Common mistakes
- Choosing the target to fit the ratio. A target must come from the chart, such as a resistance level or a measured move, not from a wish to show 1:3.
- Moving the stop to improve the ratio. A tighter stop inside normal noise looks better on paper and gets hit more often. Use ATR to judge whether a stop has room.
- Ignoring costs. Spread, fees and slippage shrink the reward and widen the risk, especially on small targets.
- Reading it alone. A 1:5 setup that almost never reaches its target can lose money; check expectancy.
For a deeper treatment, see risk-reward ratio explained.
In SnapPulse
Every chart scan returns an entry zone, an invalidation level, a target and the resulting risk/reward ratio, alongside a 1-to-10 risk score. Download SnapPulse to check the ratio on your next setup.
Educational content — not financial advice.
Updated