Risk-reward ratio
The risk-reward ratio compares the amount you stand to gain with the amount you stand to lose on a trade, measured from entry to target and from entry to stop.
How Risk-reward ratio is calculated
Ratio = (target - entry) / (entry - stop). Entry 50, stop 48, target 56 gives 6 / 2 = 3, or 3 to 1. The win rate needed just to break even is 1 / (1 + ratio) before costs: 50 percent at 1 to 1, 33 percent at 2 to 1, 25 percent at 3 to 1.
How it is read
A higher ratio needs a lower win rate to break even, but a distant target is also hit less often. The two move together.
Common mistakes
- Choosing a large ratio without checking how often price reaches the target.
- Ignoring costs, which raise the break-even win rate.
- Treating the ratio as a quality score. A 1 to 1 trade with a high hit rate can be fine and a 5 to 1 trade rarely hit can be poor.
What Tickfloor tested
Tickfloor has not published a backtest of a rule built only on Risk-reward ratio. It describes or manages something rather than giving a signal, so there is no strategy to score. It still shapes how any tested rule should be read.
Lessons that cover it
Related concepts
General information only. It doesn't consider your objectives, finances or needs. Tickfloor holds no financial services licence and never places trades.