What is the risk reward ratio?

How it is calculated, and where it comes from

Three prices are needed: where a position would be opened, where it would be closed if the idea is wrong, and where it would be closed if the idea works. The ratio is the second distance divided by the first.

None of the three is given by the market. They are decisions, and the ratio inherits every one of them. This is why the number can be made to say anything: moving the target further away improves the ratio instantly and changes nothing about whether the market will get there.

A high ratio is not a good trade

This is the misunderstanding the ratio invites, and it is expensive.

A ratio of one to ten sounds excellent. It says the target is ten times further than the stop, which also means price has to travel ten times further to reach it. If that target sits in open space with nothing between here and there, the ratio is high precisely because the outcome is unlikely.

There is one honest thing the ratio does tell you, and it is a threshold rather than a promise. A ratio of one to R breaks even at a win rate of one divided by one plus R. One to one needs better than one trade in two. One to three needs better than one in four. One to ten needs better than one in eleven. The threshold falls as the ratio rises, and what rises with it is the difficulty of ever reaching that target. And the threshold is the optimistic version: it ignores the spread and the slippage, which are covered in the guide on order types, so the real break even sits above it.

The two halves cannot be judged separately. A ratio is only meaningful alongside how often the idea works, and that second number is not something a chart provides. Any source that presents a ratio as proof of quality has quietly dropped half the arithmetic.

The stop is the part that has to be real

The most common way to manufacture a good-looking ratio is to move the stop closer. It improves the number, and it also puts the stop somewhere the market routinely goes.

A stop belongs where the idea would be wrong, not where the arithmetic looks better. The same move made later is worse still: widening a stop that is about to be hit is not giving the trade room, it is deleting the sentence that said the idea was wrong. If the reason for the trade is a level, the stop belongs beyond that level, far enough that ordinary noise does not reach it. Where the resting orders sit is exactly what the guide on liquidity describes, and a stop placed just beyond an obvious high is a stop placed where a great many others already are.

Put the other way round: the stop is decided by the chart, and the ratio is whatever falls out of it. Reversing that order is how a reasonable idea becomes an unreasonable trade.

The target has to land somewhere real too

A target drawn at a round multiple of the stop is a number, not a price. A target at a level where the market has already stopped, or at the edge of a range, or where a large untraded gap sits, is a price the market has some reason to reach. An analysis that hands you three targets hands you three ratios, and only one of them can be the number quoted. Take half the position off before that one and the ratio you calculated is no longer the ratio you traded.

That is the practical use of the ratio: not to set the target, but to measure the one the chart already suggested. If the nearest real level gives a ratio of one to one, that is information about the situation. Stretching the target past it to reach a nicer number does not improve the situation, it just hides it.

Questions people ask

What is a good risk reward ratio?

There is no such thing in isolation, and any figure given without a win rate is incomplete. A ratio of one to one is fine if the idea works often; one to five is poor if it almost never reaches the target. The pairing is what matters, and only one half of it is visible on a chart.

How do I calculate it?

Compare the distance from the entry to the stop with the distance from the entry to the target. Twenty points of risk and sixty of target is one to three. Use prices, not percentages of an account, which is a separate question.

Should the stop or the target be decided first?

The stop, and it is not close. The stop is where the idea would be proven wrong, which is a fact about the chart. The target is where the market has a reason to go, which is also a fact about the chart. The ratio is what falls out of those two, not an input to either.

Is a 1:2 ratio a rule?

It is a convention that got repeated until it sounded like one. It is a reasonable starting point for thinking about whether a trade is worth its risk, and it is not a property of markets.

Where the risk appears in an analysis

Trading AI reads a photo or a screenshot of any chart and returns a trade plan with its risk stated: the levels involved, where the idea would be wrong, and what the resulting ratio is. Those come from the chart in the image, so the plan describes the situation on screen rather than a preference set in advance.

Where a stop placed just beyond an obvious high is likely to end up: What is liquidity in trading?

The levels a target has some reason to reach: What are support and resistance?

Whether the market is in a state where the idea has room to work: What is a market regime?

This page is educational. It is not financial advice, and nothing here is a recommendation to buy or sell anything.