What is the risk/reward ratio?

The risk/reward ratio (R:R) is the planned reward of a trade divided by its planned risk, both measured from the entry. Risk runs from the entry to the stop loss, the price that proves the idea wrong. Reward runs from the entry to the target, the price where you plan to take profit. Both are set before you enter, and that is the point: the ratio is a filter you apply while you are still neutral.

Traders write it two ways. This guide puts risk first, so 1:2 means risking 1 to make 2. Others put reward first and write the same trade as 2:1, or simply 2R. Neither is wrong; just check which number is the risk before you compare. Our trading glossary lists the related terms, and the technical analysis for beginners guide shows where the ratio fits in a full chart routine.

How do you calculate the risk to reward ratio?

Three prices and one division. The steps in the list below work for any stock, ETF or future, long or short.

Long, hypothetical: buy at $50.00, stop at $49.40, target at $51.20. Risk is $0.60, reward is $1.20, and $1.20 ÷ $0.60 = 2, so the trade is 1:2. Short, hypothetical: short at $120.00, stop at $120.90, target at $118.65. Risk is $0.90, reward is $1.35, and $1.35 ÷ $0.90 = 1.5, so the trade is 1:1.5.

On TradingView, the built-in Long Position and Short Position drawing tools do the math for you: drag the entry, stop and target on the chart and the tool shows the risk/reward ratio. In its settings you can enter your account size and your risk, in money or as a percentage of the account, and it shows the quantity too.

  1. Risk per share = entry − stop for a long, or stop − entry for a short.
  2. Reward per share = target − entry for a long, or entry − target for a short.
  3. R:R = reward ÷ risk. A result of 2 means 1:2; a result of 0.8 means you risk more than you aim to make.
  4. Compare the result with the minimum you set in your plan, before the order goes in.

What are R multiples?

R is your initial risk per share, the distance from entry to stop. Counting in R lets you compare a trade on a $20 stock with a trade on a $400 stock. In the long above, 1R is $0.60. Exit at the $51.20 target and the result is +2R. Get stopped at $49.40 and it is −1R. Leave at $49.70 because the setup fell apart, and it is −0.5R. Leave at $50.90, and it is +1.5R.

The R vocabulary was popularized by trading author Van K. Tharp, whose book Trade Your Way to Financial Freedom treats a trading method as a set of R multiples and discusses expectancy and position sizing. Keeping your journal in R rather than dollars shows whether the method works, whatever share count you used.

Risk (1R)
The distance from entry to stop, per share, fixed when you enter. Moving the stop later does not change the original R.
Reward
The distance from entry to target, per share. Expressed in R, a reward twice the risk is 2R.
R multiple
A trade result divided by the initial risk: +2R, −1R, +0.5R. It makes trades of different sizes and prices comparable.
Breakeven hit rate
The share of trades that must reach the target for the wins to pay for the losses: 1 ÷ (1 + reward/risk), before costs.
Expectancy
The average result per trade in R over many trades: the share of winners times the average win, minus the share of losers times the average loss.

What is a good risk reward ratio?

There is no single good number, because the ratio only means something next to how often a setup reaches its target. The link is pure arithmetic: breakeven hit rate = 1 ÷ (1 + R), where R is reward ÷ risk. Written with prices, the same formula is risk ÷ (risk + reward).

Check it at 1:2. Out of three trades, one winner at +2R and two losers at −1R each add up to zero, so being right on one trade in three, 33.3%, is breakeven. Right more often, the plan makes money before costs; right less often, it loses. These figures are an identity, not a forecast: they say nothing about how often any setup actually works.

Costs move the line. Say commissions and slippage cost a hypothetical $0.04 a share per round trip on the long above. A win then nets $1.16 and a loss costs $0.64, so the breakeven hit rate rises from 33.3% to about 35.6%. Tight stops with small targets feel costs the most. Many traders want at least 1:1.5 to 1:2 on day trades, then check their own journal for how often that target is really reached.

  • 1:1 → right on more than 50% of trades to come out ahead before costs.
  • 1:1.5 → more than 40%.
  • 1:2 → more than 33.3%.
  • 1:3 → more than 25%.

Where should the stop and target go?

Place the stop first, at invalidation: just beyond the price that proves the trade idea wrong, plus a small buffer for noise. For a long off support, that is under the support zone and the swing low that formed the bounce. For a short at resistance, it is above the zone and the swing high. The stop loss and take profit guide covers buffers and ATR in detail.

Then place the target just in front of the next level that could stop the move: for a long, the nearest resistance, a prior swing high, the prior day's high or VWAP from below; for a short, the nearest support. Only now divide. If the ratio falls short of your minimum, skip the trade or wait for a better entry. Do not slide the stop closer or the target farther until the numbers look right.

UpTickFlow, our invite-only TradingView indicator, shows this plan with every signal: the signal appears after the candle closes, with an entry, a stop and a target drawn on the chart before the trade, so the risk/reward is visible up front and you can size from the stop. It scores each setup from 0 to 100, shows only A+ setups and stays quiet when there is no room to the target. It does not predict the market or place trades, and your risk per trade stays your decision. See how it works.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn trade plan on a candle chart: an entry, a dotted stop line below it labeled stop, and a dashed line rising to the target labeled target.

Why a bigger risk/reward ratio is not always better

A ratio is only as honest as its target. Take the long again: buy at $50.00, stop at $49.40. A 1:5 target sits at $53.00 and needs a hit rate above only 16.7% to break even. On paper it looks tempting. But if the prior day's high is at $50.70, price has to get through that resistance first, and it often stalls there. A realistic target just before it, at $50.65, offers $0.65 against $0.60: about 1:1.1, a trade most plans would skip.

A low breakeven bar does not help if price rarely gets there: if it reaches $53.00 on fewer than one trade in six, the 1:5 plan loses money despite its handsome ratio. The same trap works from the other side. Squeeze the stop to $49.85 and the $50.65 target becomes 1:4.3 on paper, but a stop $0.15 away sits inside normal candle noise and gets hit before the idea is tested.

Read the chart for room first, then compute the ratio. The support and resistance strategy guide shows how to mark the levels that set realistic targets.

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A hand-drawn chart with a resistance zone above and a support zone below: price dips into support, rejects it and prints a buy signal, with the resistance zone overhead as the next level in its way.

How does risk/reward connect to position size?

The ratio says nothing about how many shares to buy. Size comes from the stop: shares = dollar risk ÷ distance to stop. That keeps every full loss close to 1R in dollars, which is what makes a ratio in R mean the same thing on every trade.

Hypothetical: a $20,000 account risking 0.5% per trade accepts a $100 loss. On the long above, the stop is $0.60 away, so $100 ÷ $0.60 = 166.67, rounded down to 166 shares, an $8,300 position. At the target, 166 × $1.20 = $199.20, or +2R. At the stop, 166 × $0.60 = $99.60, or −1R, plus costs.

With a stop $1.20 away instead, the same $100 buys 83 shares, and the target has to be $2.40 away to keep 1:2. The position size calculator does this math for longs and shorts. Keep in mind that a stop order becomes a market order once triggered, so a gap or a fast move can fill you beyond the stop and cost more than 1R.

What is expectancy, and why does it matter more than the ratio?

Expectancy is the average result per trade over many trades, in R. In plain words: the share of trades that won times the average winner, minus the share that lost times the average loser. Positive means the method made money on that sample; negative means it lost, whatever the planned ratio was.

A hypothetical journal of 40 trades: 15 winners averaging +1.8R and 25 losers averaging −1R. That is (15/40 × 1.8) − (25/40 × 1) = 0.675 − 0.625 = +0.05R per trade before costs, a thin edge that costs could erase. Now cut the winners early so they average +1.2R: 0.45 − 0.625 = −0.175R per trade. Or let the losers drift to −1.3R by moving stops: 0.675 − 0.8125 = about −0.14R. Same entries, opposite outcome.

So the planned ratio is a promise you make to yourself, and expectancy shows whether you kept it. A few dozen trades is a small sample, results change with market conditions, and past numbers in a journal do not predict future ones.

Mistakes that shrink your real risk/reward

Most of these happen during the trade, after the plan was fine. They are especially common in the first months of day trading.

  • Moving the stop farther away as price approaches it. A planned −1R loss becomes −2R or worse, and the breakeven math no longer applies.
  • Cutting winners before the target with no rule. The 1:2 plan quietly becomes 1:1 and then needs a hit rate above 50%.
  • Moving the stop to breakeven too early, which turns trades that would have reached the target into scratches.
  • Chasing the entry. Plan $50.00 with the stop at $49.40 and the target at $51.20, buy late at $50.40, and you risk $1.00 to make $0.80, about 1:0.8.
  • Squeezing the stop or stretching the target after the fact so the ratio passes your rule.
  • Ignoring commissions and slippage, which raise every breakeven hit rate a little.

A pre-trade risk/reward checklist

Ask these questions before every order, in the same order, while you are still flat. If any answer is no, there is no trade.

  1. Does the higher timeframe agree with the direction? The multi-timeframe analysis guide shows how to check.
  2. Is price at a level that matters: support, resistance, VWAP or a trend line?
  3. Has the trigger candle closed? A hammer or an engulfing candle only counts once it has.
  4. Are the stop (at invalidation) and the target (before the next level) set, and does reward ÷ risk meet your minimum?
  5. Is the size set from the stop, so a full loss costs your fixed risk, such as 0.5% to 1% of the account?
  6. Are your rules for partial exits or a trailing stop decided now, not mid-trade?

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A hand-drawn pre-trade checklist with ticked boxes for higher timeframe agrees, price is at a level, the candle has closed, and stop & target are set; the last line reads size = 1% risk.