# Risk/Reward Ratio > The risk/reward ratio compares a trade's potential loss with its potential gain. Learn the formula, how it links to win rate, break even maths and common traps. Source: https://learn.tradelabsai.com/risk/risk-reward-ratio/ Track: Risk Management · Level: Beginner · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Risk/Reward Ratio", https://learn.tradelabsai.com/risk/risk-reward-ratio/ The risk/reward ratio compares how much you could lose on a trade with how much you could gain. If you risk $100 to make $300, your risk/reward is 1 to 3 (often written 1:3, or as a reward to risk of 3). It is one of the most quoted numbers in trading, and one of the most misunderstood. A high ratio alone does not make a good trade; what matters is the ratio combined with how often trades like it actually win. ## How to calculate it ``` Risk = |Entry − Stop| Reward = |Target − Entry| Reward to risk = Reward ÷ Risk ``` **Example: A long trade** Entry $40.00, stop $38.50, target $44.50. Risk = $1.50. Reward = $4.50. Reward to risk = 3.0, often written as 1:3. Many traders measure results in **R multiples**, where 1R is the amount risked. A trade that gains $4.50 when risking $1.50 is a +3R trade. See [Trading Journal](https://learn.tradelabsai.com/start-here/trading-journal/). ## Risk/reward and win rate go together The ratio you need depends on how often you win. The break even win rate for a given reward to risk is: ``` Break even win rate = 1 ÷ (1 + Reward to risk) ``` | Reward to risk | Break even win rate | |---|---| | 0.5 | 66.7% | | 1.0 | 50% | | 1.5 | 40% | | 2.0 | 33.3% | | 3.0 | 25% | | 5.0 | 16.7% | A strategy with a 1:3 risk/reward profits if it wins more than 25% of the time, ignoring costs. A strategy with a 1:1 ratio needs to win more than half the time. Neither is automatically better. See [Expectancy](https://learn.tradelabsai.com/risk/expectancy/) and [Win Rate and Payoff Ratio](https://learn.tradelabsai.com/portfolio/win-rate-and-payoff-ratio/). ## The trap of chasing high ratios It is easy to make any trade look like 1:5 by placing a tight stop and a distant target. But a tight stop gets hit more often, and a distant target is reached less often, so the win rate falls. The ratio on paper rises while the real expectancy may not change, or may get worse. **Example: Same trade, different numbers** Setup A: stop $1.50 away, target $3.00 (1:2). Historically wins 45% of the time. Expectancy = 0.45 × 2 minus 0.55 × 1 = +0.35R. Setup B: same entry, stop $0.75 away, target $3.75 (1:5). Win rate drops to 15% because the tight stop is hit by noise. Expectancy = 0.15 × 5 minus 0.85 × 1 = minus 0.10R. The "better" ratio produced a losing strategy. ## Setting realistic targets Targets should come from the market, not from a wish for a particular ratio: - The next significant resistance or support level. See [Support and Resistance](https://learn.tradelabsai.com/price-action/support-and-resistance/). - A measured move from a pattern. - A multiple of ATR suited to your holding period. - Liquidity pools above highs or below lows. See [Liquidity in Smart Money Concepts](https://learn.tradelabsai.com/smart-money/smc-liquidity/). Then check: does the realistic target, compared with the logical stop, give a ratio that makes sense for your strategy's win rate? If not, skip the trade rather than moving the stop or target to force it. See [Profit Targets](https://learn.tradelabsai.com/position-management/profit-targets/). ## Using risk/reward in your plan 1. Set a minimum reward to risk based on your historical win rate. 2. Calculate it before every trade as part of your [Pre-Trade Checklist](https://learn.tradelabsai.com/start-here/pre-trade-checklist/). 3. Track actual R multiples in your journal to see whether targets are realistic. ## Common mistakes - **Treating a high ratio as a high quality trade.** - **Tightening stops** to improve the ratio. - **Ignoring win rate** when judging a strategy. - **Moving targets further** once in a trade without a reason. ## Frequently asked questions ### What is a good risk/reward ratio? It depends on your win rate. Many traders aim for at least 1:1.5 or 1:2, but a strategy with a high win rate can be profitable at lower ratios. ### How do you calculate the risk/reward ratio? Divide the distance from entry to target by the distance from entry to stop. ### Is a 1:3 risk/reward always better than 1:1? No. A 1:3 trade with a 20% win rate loses money, while a 1:1 trade with a 60% win rate makes money. Ratio and win rate must be considered together. Next, cap your losses per day with a [Maximum Trade Risk and Daily Loss Limits](https://learn.tradelabsai.com/risk/daily-loss-limit/). ## Continue learning - Next lesson: [Maximum Trade Risk and Daily Loss Limits](https://learn.tradelabsai.com/risk/daily-loss-limit/) - Previous lesson: [Stop Loss Strategies](https://learn.tradelabsai.com/risk/stop-loss-strategies/) - Related: [Stop Loss Strategies](https://learn.tradelabsai.com/risk/stop-loss-strategies/): A good stop sits where your trade idea is proven wrong. Compare structure, volatility, percentage and time stops, with examples and the mistakes to avoid. - Related: [Expectancy](https://learn.tradelabsai.com/risk/expectancy/): Expectancy is the average amount you win or lose per trade. Learn the formula, how win rate and payoff combine, expectancy in R and how to improve it. - Related: [Position Sizing](https://learn.tradelabsai.com/risk/position-sizing/): Position sizing decides how many shares or contracts to trade so each loss stays small. Learn the formula, worked examples for each market and common mistakes. - Related: [Profit Targets](https://learn.tradelabsai.com/position-management/profit-targets/): Good profit targets come from market structure, not wishes. Learn target methods using levels, measured moves, ATR and R multiples, and how to manage them. - Related: [Win Rate and Payoff Ratio](https://learn.tradelabsai.com/portfolio/win-rate-and-payoff-ratio/): Win rate and payoff ratio together decide whether a strategy makes money. Learn how to calculate both, the breakeven formula and why high win rates can mislead. - Related: [Risk/Reward Calculator](https://learn.tradelabsai.com/tools/risk-reward-calculator/): Free risk reward calculator. Enter entry, stop and target prices to get the reward to risk ratio and the win rate you need to break even.