Risk-reward ratio (R:R or RRR) is the relationship between the potential loss and potential gain of a trade. It’s one of the most important metrics in trading because it determines whether your strategy can be profitable over time, regardless of how often you win.
How to Calculate Risk-Reward Ratio
The risk-reward ratio formula is:
Risk-Reward Ratio = (Target Price - Entry Price) / (Entry Price - Stop Loss)
Or more simply:
R:R = Potential Profit / Potential Loss
Calculation Example
Let’s say you’re buying AAPL shares:
- Entry Price: $150
- Stop Loss: $145 ($5 risk)
- Target Price: $165 ($15 potential profit)
Risk-Reward Ratio = $15 / $5 = 1:3
This means for every $1 you risk, you stand to gain $3.
Risk-Reward Ratio Examples
| Entry | Stop Loss | Target | Risk | Reward | R:R Ratio |
|---|---|---|---|---|---|
| $50 | $48 | $54 | $2 | $4 | 1:2 |
| $100 | $95 | $115 | $5 | $15 | 1:3 |
| $200 | $190 | $215 | $10 | $15 | 1:1.5 |
Why Risk-Reward Ratio Matters
The power of risk-reward becomes clear when combined with win rate:
| Win Rate | Required R:R for Breakeven | 1:2 R:R Result |
|---|---|---|
| 25% | 1:3 | Losing |
| 33% | 1:2 | Breakeven |
| 40% | 1:1.5 | Profitable |
| 50% | 1:1 | Profitable |
Key insight: With a 1:2 risk-reward ratio, you only need to win 33% of your trades to break even. Anything above that is profit.
Common Risk-Reward Mistakes
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Setting unrealistic targets – A 1:10 R:R sounds great until you realize the market rarely moves that far without pullbacks. Most targets hit 1:2 to 1:3 before reversing.
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Ignoring market structure – Your target should be at a logical level (resistance, Fibonacci, round number), not an arbitrary multiple of your risk.
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Moving stop loss to “improve” R:R – Widening your stop to get a better ratio increases actual risk. Your stop loss should be based on technical invalidation, not ratio optimization.
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Forgetting about win rate – A 1:1 R:R with 60% win rate beats a 1:3 R:R with 25% win rate. The combination matters more than either metric alone.
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Not accounting for slippage – In volatile markets, your actual exit price may differ from planned. Factor this into your calculations.
How JournalPlus Tracks Risk-Reward Ratio
JournalPlus automatically calculates your planned vs. actual R:R for every trade. You can filter trades by R:R achieved to identify which setups deliver the best ratios, and track how your average R:R changes over time.
