Risk Reward Ratio: worked example
| Entry price | $50 |
|---|---|
| Stop-loss price | $48 |
| Profit target | $58 |
| Reward-to-risk ratio | 3.00× |
| Break-even win rate | 25.0% |
| Risk per share | $2.50 |
Common error: Chasing a high ratio while ignoring the chance of reaching the target. A 5 to 1 trade that almost never gets there loses money over time.
Risk Reward Ratio: formula
FINRA Regulatory Notice 21-12: stop-order execution risk · OpenStax Prealgebra: ratios and proportions
The ratio does not say how likely the target is to be reached, and a great ratio on a low-probability target is not a good trade. Costs and slippage shift the break-even upward. Stops can be missed in gaps, and traders often move stops when losing, which invalidates the plan.
Entry price is where you would enter, the stop-loss is where you would exit at a loss, and the profit target is where you would take gains. Set the stop and target from analysis of the chart or the reason for the trade before you enter, not afterward. Use the same units for all three.
The ratio compares the potential gain per share with the potential loss per share.
Risk Reward Ratio: changing Entry price
| Entry price | Reward-to-risk ratio | Break-even win rate | Risk per share |
|---|---|---|---|
| $40 | -2.33× | 0.000% | -$7.50 |
| $45 | -5.00× | 0.000% | -$2.50 |
| $50 (example) | 3.00× | 25.0% | $2.50 |
| $55 | 0.33× | 75.0% | $7.50 |
| $60 | -0.20× | 0.000% | $13 |
Risk Reward Ratio: compare input ranges
| Input | Tested from | To | Reward-to-risk ratio: low input | Reward-to-risk ratio: high input | Swing |
|---|---|---|---|---|---|
| Stop-loss price | $43 | $52 | 1.07× | -3.75× | 4.82× (161%) |
| Entry price | $45 | $55 | -5.00× | 0.33× | 5.33× (178%) |
| Profit target | $52 | $63 | 0.80× | 5.20× | 4.40× (147%) |
Risk Reward Ratio: individual input comparisons
| Input | Value | Reward-to-risk ratio | Break-even win rate | Risk per share |
|---|---|---|---|---|
| Entry price | $40 | -2.33× | 0.000% | -$7.50 |
| $45 | -5.00× | 0.000% | -$2.50 | |
| $50 | 3.00× | 25.0% | $2.50 | |
| $55 | 0.33× | 75.0% | $7.50 | |
| $60 | -0.20× | 0.000% | $13 | |
| Stop-loss price | $38 | 0.63× | 61.5% | $12 |
| $43 | 1.07× | 48.3% | $7.00 | |
| $48 | 3.75× | 21.1% | $2.00 | |
| $52 | -3.75× | 0.000% | -$2.00 | |
| $57 | -1.07× | 0.000% | -$7.00 | |
| Profit target | $46 | -1.60× | 0.000% | $2.50 |
| $52 | 0.80× | 55.6% | $2.50 | |
| $58 | 3.20× | 23.8% | $2.50 | |
| $63 | 5.20× | 16.1% | $2.50 | |
| $69 | 7.60× | 11.6% | $2.50 |
Risk Reward Ratio: combined input changes
| Entry price / Stop-loss price | $38 | $48 | $57 |
|---|---|---|---|
| $40 | 8.75× | -2.19× | -1.03× |
| $45 | 1.79× | -4.17× | -1.04× |
| $50 | 0.63× | 3.75× | -1.07× |
| $55 | 0.15× | 0.36× | -1.25× |
| $60 | -0.11× | -0.21× | -0.83× |
Risk Reward Ratio: which assumptions move the result?
Risk Reward Ratio: values and definitions
| Quantity and definition | Value used |
|---|---|
| Entry price | $50 |
| Stop-loss price | $48 |
| Profit target | $58 |
| Reward-to-risk ratio | 3.00× |
| Break-even win rate | 25.0% |
| Risk per share | $2.50 |
Investing & Returns calculators: Kelly Criterion Calculator, Net Present Value (NPV) Calculator, Continuous Compounding Calculator, Compound Interest & Future Value Calculator, Investment Return Calculator, CAGR and Required Annual Return Calculator.
Reward-to-risk compares what a trade could gain with what it could lose. Entering at $50 with a $47.50 stop and a $57.50 target risks $2.50 to make $7.50, a ratio of 3 to 1. That ratio sets how often you need to win: at 3 to 1, a win rate of 25 percent breaks even before costs.
The higher the ratio, the less often you have to be right.
Set the target from where the price could plausibly go, not from the ratio you want. A target far beyond any reasonable move makes the ratio look good and the plan poor.
Size the trade with the position size calculator, and consider bet size with the Kelly criterion calculator. The option profit page covers payoffs for options, and the stock profit calculator records outcomes. Track your actual win rate over many trades before trusting a ratio.
Does a 3-to-1 reward ratio need exactly 25% winners?
It breaks even at 25% only with the assumed full wins and losses, no fees, and exits exactly at the entered prices.
Does a distant target establish a profitable strategy?
No. The equation does not estimate the chance of reaching the target or model gaps and slippage.
What is a good risk-reward ratio?
The win rate matters. Twice the loss is a 2-to-1 reward. Three times is 3-to-1.
Before costs, those scenarios break even at one third and one quarter respectively. Profit needs a higher win rate. A large proposed payoff says nothing about how often the target will actually be reached or how execution costs change the result.
How is the break-even win rate calculated?
It equals 1 divided by one plus the ratio. At 3 to 1 you need to win one in four trades to break even before costs.
Does a high ratio guarantee profit?
No. If the target is rarely reached, a high ratio still loses money. The ratio and the win rate must be judged together.