Risk/Reward Ratio
Learn what risk/reward measures, what it does not measure, and how it interacts with win rate and expectancy.
What risk/reward measures
Risk/reward compares the amount planned to be lost if a trade fails with the amount targeted if it succeeds. If $100 is at risk for a $200 target, the planned reward is twice the planned risk, often described as 2:1 reward-to-risk.
Why the ratio alone is incomplete
A large target is not automatically better. A strategy that targets five units of reward for one unit of risk may win rarely; another may target less but win more often. The useful question is how payoff size combines with win probability and actual execution over a meaningful sample.
Expectancy combines win rate, average win and average loss. Risk/reward is only one component.
Planned versus realized
Realized results can diverge from the plan because of partial exits, slippage, early exits, missed stops and changing volatility. A trading journal should therefore track both planned and realized risk/reward.
Common misuse
Choosing an arbitrary far-away target solely to claim a 3:1 or 5:1 ratio does not create an edge. Targets should be plausible in the market context and supported by testing, while risk still reflects the true invalidation point.
R-multiples
Some traders normalize outcomes by the initial planned risk, calling one planned unit of risk “1R.” A +2R trade earns twice the initial risk unit; a -1R trade loses one risk unit. This can make results comparable across trades with different share counts.
Ratio without probability is incomplete
A high reward target can look attractive while having a very low chance of being reached. A strategy should be evaluated using both average winner/loser size and win/loss frequency. This is why expectancy is more informative than a target ratio in isolation.
Planned versus realized R
A planned 2:1 reward-to-risk relationship does not mean the trade will deliver two units of reward for every unit risked. Partial exits, slippage, early exits and gaps all change the realized result.