Risk-Reward Ratio

Risk-reward ratio measures the potential loss versus the potential gain on a trade before you enter it. It is one of the most fundamental risk management metrics in trading, serving as a pre-trade filter that helps you evaluate whether a setup is worth taking. By comparing the distance to your stop-loss against the distance to your take-profit, you quantify exactly how much you stand to gain for every dollar you put at risk.

Formula & Calculation

Risk-Reward Ratio = (Entry Price - Stop-Loss) / (Take-Profit - Entry Price)

Where:

• Entry Price = the price at which you open the position
• Stop-Loss = your predetermined exit price if the trade moves against you
• Take-Profit = your target exit price if the trade moves in your favor

For a long trade, risk is the distance below your entry to the stop-loss, and reward is the distance above your entry to the take-profit. The result is expressed as a ratio — 1:2 means you risk one unit to potentially gain two units. A lower first number relative to the second indicates a more favorable setup.

For short trades, the calculation is reversed: risk is the distance above entry to the stop-loss, and reward is the distance below entry to the take-profit.

Benchmarks

Level	Range	What It Means
Excellent	>= 1:3	Potential reward is 3x or more the risk — only need to win 25%+ of trades to profit
Good	1:2 to 1:3	Solid reward relative to risk — profitable with a 34%+ win rate
Acceptable	1:1 to 1:2	Requires a win rate above 50% to be profitable long-term
Poor	under 1:1	Risk exceeds reward — demands a very high win rate to avoid losses

These benchmarks assume commissions and slippage are factored in. A 1:2 ratio that becomes 1:1.7 after costs is still acceptable, but a 1:1 ratio that erodes to 1:0.8 becomes dangerous.

Practical Example

A trader with a $25,000 account identifies a long setup on AAPL trading at $185.00. Based on the nearest support level, she places her stop-loss at $183.50 — a risk of $1.50 per share. Her take-profit, set at the next resistance zone, is $188.00 — a potential reward of $3.00 per share.

Risk-Reward Ratio = $1.50 / $3.00 = 1:2

She risks 1% of her account ($250) on this trade, which means she can buy 166 shares ($250 / $1.50). If the trade hits her target, she earns $498 (166 x $3.00). If stopped out, she loses $249 (166 x $1.50).

With a 1:2 ratio, she only needs to win 34% of similar trades to break even. If her win rate on this setup type is 45%, her expected value per trade is positive: (0.45 x $498) - (0.55 x $249) = $224.10 - $136.95 = $87.15.

According to the benchmarks, this 1:2 ratio falls in the “Good” range.

How to Track Risk-Reward Ratio

1. Set levels before entry — Determine your stop-loss and take-profit based on technical levels (support, resistance, moving averages) before placing the trade, never after.
2. Calculate the ratio — Divide the risk distance by the reward distance. If AAPL entry is $185, stop is $183.50, and target is $188, the R:R is $1.50 / $3.00 = 1:2.
3. Log both planned and actual — Record your intended R:R at entry and your realized R:R at exit. The gap between them reveals whether you are cutting winners short or letting losers run.
4. Review weekly — Compare your average planned R:R against your average realized R:R to identify execution problems. A consistently lower realized ratio signals premature exits.

How to Improve Risk-Reward Ratio

1. Enter closer to key levels — Placing entries near support (for longs) or resistance (for shorts) naturally tightens your stop-loss distance, improving the ratio without requiring a more distant target.
2. Use partial exits at 1R — Take half your position off at a 1:1 move, then let the remainder run toward 2R or 3R. This locks in profit while preserving upside.
3. Filter setups by minimum R:R — Refuse trades below 1:2 unless your historical data shows a win rate above 60% for that setup type. This single rule eliminates most low-quality trades.
4. Avoid widening stops — If a trade requires a wider stop than your plan allows, skip it. Widening your stop to avoid being stopped out destroys the original ratio.
5. Combine with expectancy — R:R alone does not tell you if a strategy works. Pair it with win rate to calculate expectancy and confirm the setup is positive expected value.

Common Mistakes

1. Fabricating favorable ratios — Setting a take-profit at an unrealistic level just to make the numbers look good. Your target must correspond to an actual technical level where price is likely to reach.
2. Ignoring win rate — A 1:5 ratio means nothing if you only win 5% of trades. R:R must be evaluated alongside your actual win rate for a complete picture.
3. Moving stops mid-trade — Widening your stop-loss after entry turns a 1:2 trade into a 1:1 or worse. This is one of the fastest ways to erode account equity.
4. Applying one ratio to all setups — A breakout trade and a range-bound mean-reversion trade have different natural R:R profiles. Let market structure dictate the ratio, not a rigid rule.
5. Confusing planned with realized — Your payoff ratio (actual average win / average loss) is the metric that matters for performance. Planned R:R is a filter; realized R:R is the result.

How JournalPlus Calculates Risk-Reward Ratio

JournalPlus automatically calculates your risk-reward ratio for every trade where stop-loss and take-profit levels are logged, displaying both planned and realized ratios on your analytics dashboard. The performance charts break down your average R:R by setup type, ticker, and time period so you can identify which strategies deliver the best reward relative to risk. You can filter your trade log to surface all trades below a specific R:R threshold, making it easy to audit whether you are consistently taking high-quality setups. The average R-multiple and profit factor metrics work alongside R:R to give you a complete view of your risk-adjusted performance.