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Risk-to-Reward Ratio Explained: Formula and Trading Examples
Calculate risk-to-reward and reward-to-risk ratios, compare break-even win rates, and see why a 1:2 trade setup can still lose money after costs.
By TickerAI
Risk-to-reward compares a trade's planned loss with its planned profit. Risking $50 to target $100 gives a risk:reward ratio of 1:2. The same setup has a reward-to-risk ratio of 2.0, often written as a 2R target.
The terminology matters. TickerAI displays reward-to-risk as a number: 2.0 means the planned reward is twice the planned risk, before costs and execution differences.
Calculate reward-to-risk from entry, stop, and target
For a long trade:
Risk distance = entry − stop
Reward distance = target − entry
Reward-to-risk = reward distance ÷ risk distance
For a short trade, the stop is above entry and the target below it; use the corresponding positive distances. A stop on the wrong side of entry is a malformed setup, not an attractive ratio.
Consider a hypothetical EURUSD long at 1.1000, stop at 1.0975, and target at 1.1050. Risk distance is 25 pips and reward distance is 50 pips. Reward-to-risk is 2.0. With volume sized to a $50 planned price loss, the target represents a $100 planned price gain.
Break-even win rate is an assumption, not a forecast
When every winner makes exactly b units, every loser loses one unit, and there are no costs:
Break-even win rate = 1 ÷ (1 + b)
| Planned risk:reward | Reward-to-risk | Theoretical break-even win rate |
|---|---|---|
| 1:1 | 1.0 | 50% |
| 1:1.5 | 1.5 | 40% |
| 1:2 | 2.0 | 33.3% |
| 1:3 | 3.0 | 25% |
A 1:3 target does not imply that one in four trades will win. Moving a target farther away changes how likely it is to be reached. The ratio describes the payoff geometry; it does not estimate that probability.
Include costs in the example
Suppose 100 hypothetical trades produce 35 winners at $100 and 65 losers at $50. Before costs, the result is $3,500 minus $3,250, or a $250 gain.
If each round trip costs $4, total costs are $400 and the sample becomes a $150 loss. The net win is $96 and the net loss $54, so the corresponding break-even win rate is $54 ÷ ($96 + $54), or 36%.
Be consistent about how costs are measured. If bid and ask execution prices already include the spread effect, subtracting that same spread again overstates costs.
Planned R and realized R answer different questions
If you initially risk $50 and close with a net $30 gain, realized R is +0.6. Closing with a net $60 loss gives −1.2R. Record the initial risk before the trade; changing that denominator afterward can hide poor execution or increased exposure.
Partial exits, trailing stops, early closes, gaps, and commissions can all make realized R differ from the target shown on the original plan. Review actual average wins and losses rather than assuming every profitable trade achieved its advertised target.
Do not force the chart to fit a ratio
Moving the stop into ordinary price noise just to display 3R does not improve the underlying setup. Nor does placing a target beyond the next obstacle without explaining why price could reach it.
TickerAI calculates a proposed idea's reward-to-risk from the entry-zone midpoint and first target, and checks it against your configured minimum. Ask whether the ratio still makes sense at the executable price, especially when the entry zone is wide. A passing ratio does not validate the trading thesis.
Continue with forex position sizing to convert price distances into money, or MT5 trade-history analysis to compare planned and realized outcomes. These calculations are educational and do not predict a strategy's future results.