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Risk-Reward Ratio

The risk-reward ratio compares how much you stand to lose on a trade against how much you stand to gain, decided before you enter.

In one line: The risk-reward ratio compares how much you stand to lose on a trade against how much you stand to gain, decided before you enter.

What it is

The risk-reward ratio (R:R) measures the potential downside of a trade against its potential upside. A 1:3 ratio means you're risking $1 to make $3. It's calculated before entry from three prices: your entry, your stop-loss (the risk), and your target (the reward).

Risk (R) = entry price − stop price. Reward = target price − entry price. Ratio = reward ÷ risk.

How it works

R:R is powerful because it decouples being right from being profitable. With a 1:3 ratio, you can be wrong more often than right and still make money, because your winners are three times the size of your losers.

It works hand-in-hand with position sizing: once you know your risk per share (entry minus stop), you size the position so the total dollar risk is a small, fixed fraction of your account.

Worked example

Example

You buy a large-cap at $100 with a stop at $95 (risking $5) and a target of $115 (reward $15). That's a 1:3 risk-reward ratio. Now the math: if you take ten such trades and win only four, you make 4 × $15 = $60 and lose 6 × $5 = $30 — you finish ahead, despite losing more of those trades than you won. This is why we say a headline win rate, by itself, tells you almost nothing.

Why it matters

Understanding R:R is the antidote to the industry's favorite marketing number: the win rate. A system that wins the large majority of its trades but risks $10 to make $1 is a disaster waiting to happen; a system that wins well under half of its trades at 1:3 compounds. This is precisely why Entry Point Trading refuses to lead with a win rate and instead teaches exits and risk framing in the open.

Keep learning

Related concepts

Stop-Loss
A pre-planned exit that caps the loss on a trade.
Position Sizing
Deciding how much to risk on a single trade.
Stock Signal
A structured buy/sell/hold call — and what a good one must include.
Support and Resistance
Price levels where buyers and sellers repeatedly step in.
Swing Trading
Holding days to weeks to capture a single price swing.
Breakout Trading
Trading a move through a defined level on rising participation.

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Common questions

FAQ

What is a good risk-reward ratio?
Many traders look for at least 1:2 (risk $1 to make $2), but there's no magic number — it depends on your win rate. A lower win rate needs a higher R:R to stay profitable. The key is knowing your numbers and only taking trades where the reward justifies the risk.
Why isn't win rate enough on its own?
Because win rate ignores the size of wins versus losses. You can win 90% of trades and still lose money if the 10% of losses are huge. Risk-reward ratio and win rate must be considered together — that combination is your expectancy.

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