In short. The risk/reward ratio (R/R, RR) is how many times the planned profit exceeds the risk: (take profit − entry) / (entry − stop). An RR of 1:2 means the target is twice as far as the stop. A high RR alone guarantees nothing: what matters is how often the price reaches the target — the win rate.
How to calculate RR
RR = |Take profit − Entry| / |Entry − Stop loss|
Buy EURUSD at 1.0850, stop 1.0830 (20 pips), target 1.0900 (50 pips). RR = 50 / 20 = 2.5, or 1:2.5. Risking $100, a trade that hits the target makes $250. How to size the position for that $100 is in «How to calculate lot size».
Planned RR and actual R
Planned RR is set before the entry, from the levels. The actual result in R comes after the exit: (exit − entry) / (entry − stop) with the sign of the result. If the target was 2.5R and you closed at 1R, the planned RR was worth nothing. Comparing plan and fact trade by trade shows where you cut winners or hold losers.
A review example. 10 trades planned at 1:2: two reached the target (+2R), three were closed early at +0.7R, five hit the stop (−1R). The total is 4 + 2.1 − 5 = +1.1R, or +0.11R per trade, while a 50% win rate with a 2R target should have given +0.5R. The average win is 1.22R instead of 2R, and its break-even win rate is 1 / (1 + 1.22) = 45%, not 33.3%. Early exits cost 3.9R of the planned five: if the target was chosen well, this is the main point of the review.
RR and win rate work together
A strategy does not lose when win rate ≥ 1 / (1 + RR):
| RR | Break-even win rate | Expectancy at a 40% win rate |
|---|---|---|
| 1:1 | 50% | −0.2 R |
| 1:1.5 | 40% | 0 R |
| 1:2 | 33.3% | +0.2 R |
| 1:3 | 25% | +0.6 R |
But the win rate is not constant: the further the target, the less often the price gets there. Raising RR from 1:2 to 1:4 is easy; keeping the win rate is not. So RR is chosen by market and setup and verified against your own trade statistics. More on the link in «Trading expectancy».
RR after spread and commission
Costs are paid on every trade: the profit in pips gets smaller and the loss gets larger. RR after costs = (target − costs) / (stop + costs). For the EURUSD trade above with 1.5 pips of spread and commission: (50 − 1.5) / (20 + 1.5) ≈ 2.26, and the break-even win rate is 30.7% instead of 28.6%. For a scalp with a 5-pip stop and a 10-pip target the same 1.5 pips give 8.5 / 6.5 ≈ 1.31 instead of 2, and the break-even win rate rises from 33.3% to 43.3%.
RR across trading styles
- Scalping — RR around 1:1 or lower with a win rate above 50%; costs are a visible share of the risk, as in the example above.
- Trend following — RR of 1:3 and more with a 25–40% win rate. The exit is often a trailing stop and the target is unknown in advance, so the actual R from the initial stop matters more.
- Partial profit-taking — half at 1R, the rest at a 2.5R target: 1.75R in total; the rest stopped at break-even — 0.5R. The planned RR is 2.5, the actual result is between 0.5 and 1.75R.
- Grids and martingale — a single leg has no stop of its own, so R is undefined; risk is measured by the worst price move, as in «Grid EAs and martingale: how to calculate the risk».
Common mistakes
- A stop that fits the RR. The stop goes where the trade idea is invalidated, not closer to make the RR look good.
- Spread and commission. On tight stops they eat a visible share of RR: with a 5-pip stop a 1-pip spread is 20% of the risk.
- Moving the target further. Without a new reason it turns the planned RR into hope.
- R from the last stop. Entry 1.0850, stop 1.0830, exit 1.0880 is +1.5R. If the stop was tightened to 1.0840 before the exit and R is measured from it, you get +3R — twice what was actually at stake.
- Looking at RR alone. Without the win rate and a sample of 50–100 trades it says nothing about profitability.
Tracking RR in the Davinchu journal
In the Davinchu trading journal you can record the «Expected RR» for each trade, and the actual R is calculated automatically from the trade's stop loss: |exit − entry| / |entry − stop|, with the sign of the result. The «Plan vs Fact» table on the «Review» tab shows planned and actual R side by side, and the journal calculates «Average R» and «Total R» across all trades. R is calculated for trades whose stop loss differs from the entry price — only they have a risk to measure it against. Average R with a sample-size badge also appears in the breakdowns by instrument, session, setup and duration, and the «What to improve» block names the best and the weak setup by average R. The lot size calculator sizes the position for the risk you want. On the Free plan two accounts connect at no cost.