How to Calculate Risk-Reward Ratio (With Examples)

Your risk-reward ratio compares how much you stand to lose if a trade hits your stop to how much you aim to make if it hits your target. You calculate it by dividing your reward (distance from entry to target) by your risk (distance from entry to stop). A trade risking $100 to make $200 has a 1:2 risk-reward ratio. Educational, not financial advice.

The formula

Risk-reward = target distance divided by stop distance, expressed as 1 to X.

• Entry $50.00, stop $49.00 (risk $1.00), target $52.00 (reward $2.00) gives 1:2.
• Entry $50.00, stop $49.50 (risk $0.50), target $51.00 (reward $1.00) gives 1:2.

Notice the ratio is about distances, not dollar size — you set your dollar risk separately through position sizing.

A worked example with position size

Say you will risk 1% of a $10,000 account, which is $100. Your stop is $0.50 away from entry. Position size = $100 divided by $0.50 = 200 shares. If your target is $1.00 away (1:2), a winner makes $200 and a loser costs $100. Our position size calculator does this maths for you so every trade risks the same fixed amount.

What is a "good" risk-reward ratio?

There is no universal answer, because risk-reward only means something alongside your win rate. A 1:3 ratio sounds great, but if you only win 20% of the time you still lose money. A 1:1 ratio can work with a higher win rate. The two numbers depend on each other:

(These are before costs — spread, commission and slippage raise the bar.)

Why traders track it

Setting a minimum risk-reward before you enter stops you taking trades where the target is tiny and the stop is huge — a common way accounts bleed out. It also forces you to define your stop and target before emotion gets involved.

Takeaway

Risk-reward is reward distance divided by risk distance, read as 1 to X. On its own it proves nothing — pair it with your realistic win rate and your costs, and size every trade so the risk stays fixed. You can rehearse this on every practice trade with a free demo and a journal.

Educational only — not financial advice. No outcome or return is promised or implied; trading carries a real risk of loss.