Risk-Reward Ratio
The risk-reward ratio compares how much you could lose on a trade (to your stop loss) with how much you could gain (to your target). A 1:2 ratio means you’re risking $1 to potentially make $2.
How to calculate it
Risk = |Entry − Stop loss| Reward = |Target − Entry| Risk:reward = 1 : (Reward ÷ Risk)
Example: buy at $50, stop at $48, target at $56. Risk is $2, reward is $6, so the ratio is 1:3.
Break-even win rate
The ratio tells you how often you need to be right just to break even (before costs):
Break-even win rate = 1 ÷ (1 + Reward/Risk) × 100
| Risk:reward | Break-even win rate |
|---|---|
| 1:0.5 | 66.7% |
| 1:1 | 50% |
| 1:1.5 | 40% |
| 1:2 | 33.3% |
| 1:3 | 25% |
| 1:4 | 20% |
Ratio and win rate go together
A high ratio on its own isn’t better. Targets further away are reached less often, so a 1:5 setup that rarely hits its target can do worse than a 1:1 setup that wins most of the time. What matters is the combination, called expectancy: the average amount won or lost per trade. Work it out with the win rate and expectancy calculator.
Include your costs
Spreads and commissions reduce the reward and add to the risk, which matters most for small targets. See bid-ask spread.
Calculate it
The position size calculator shows risk:reward from your entry, stop and target, alongside the lot size. On TradingView, the Long Position and Short Position drawing tools display the ratio directly on the chart.
Educational explanation only. ChartWatch is independent and doesn’t give trading or investment advice. Trading carries a risk of loss.
FAQ
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