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Risk–reward ratio

Also calledR:R · reward-to-risk ratio

Risk–reward ratio compares the amount a trade may lose if it hits the stop-loss with the amount it may gain if it reaches the target.

In plain English

What Risk–reward ratio means

The ratio is usually written as risk to reward, such as 1:2. That means the planned loss is one unit for every two units of planned gain. It is a planning metric, not a prediction, because real-world fills, slippage, spreads, and gaps can change the result.

Why it matters

It helps traders compare setups on a consistent basis. A trade with a small target and a large stop may need a much higher win rate to be profitable than a trade with a larger target relative to risk.

Example

If a trade risks 25 pips to aim for 50 pips, the risk–reward ratio is 1:2. This is simplified and ignores spread and slippage.

Quick answers

Common questions

Is a higher ratio always better?+

Not necessarily. A larger target can lower the chance of reaching it, so the ratio must be considered with the trade’s win rate and execution quality.

Is risk–reward the same as profit factor?+

No. Profit factor compares total wins with total losses across many trades, while risk–reward is usually a per-trade planning measure.

Sources

Go to the original material.

01SEC discussion of risk versus reward↗02CME Group educational material on trade risk planning↗03SEC material referencing reward-to-risk language↗

Connected concepts

Follow the language.

Risk & accountsPosition sizingPosition sizing is the process of choosing how large a trade or position should be, usually by linking the size to account risk, stop distance, margin, and... Orders & executionStop-loss orderA stop order used to exit an existing position when price reaches a specified level, designed to limit losses if the market moves against the trade. Orders & executionTake-profit orderAn order that closes an open position when price reaches a preselected favorable level, allowing a trader to lock in gains automatically if the market moves as... Orders & executionSlippageSlippage is the difference between the expected price of an order and the price at which it actually executes, usually because the market moves or available... Orders & executionVolatilityVolatility is the degree to which a price moves over time, usually measured by the size and frequency of price changes.
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