What is Risk-Reward Ratio?
The risk-reward ratio compares the distance from entry to target (the potential reward) with the distance from entry to stop (the potential loss).
How it works
A trade with a 2-point stop and a 4-point target has a risk-reward ratio of 1:2. The ratio sets the win rate you need to break even before costs: 1 divided by (1 plus the reward multiple). At 1:2 you need to win a third of your trades, at 1:1 half of them, and at 1:3 a quarter.
What it can't tell you
A large ratio does not make a trade good, because a far target is also less likely to be hit. The ratio only matters together with how often the setup actually wins, and costs raise the win rate needed.
How Tickfloor uses it
Tickfloor's trade reads place the target at a fixed multiple of the stop distance.
Does it work as a strategy?
This is a concept more than a trading rule, so there is no single strategy to score. It matters for reading the results below.
Tickfloor's research desk has backtested 517 strategies, most against an equal-weight benchmark of the same assets rebalanced daily that pays no costs (the strategies pay theirs). After correcting for the 598 tests run (Benjamini-Hochberg), 0 passed. That does not prove no strategy works. These are historical diagnostics, not validation under Testing Standard v2: the backtest harness predates that standard and has not been re-run to meet it.
General information only. It doesn't consider your objectives, finances or needs. Tickfloor holds no financial services licence and never places trades.
Common questions
What is Risk-Reward Ratio?
The risk-reward ratio compares the distance from entry to target (the potential reward) with the distance from entry to stop (the potential loss).
How does Risk-Reward Ratio work?
A trade with a 2-point stop and a 4-point target has a risk-reward ratio of 1:2. The ratio sets the win rate you need to break even before costs: 1 divided by (1 plus the reward multiple). At 1:2 you need to win a third of your trades, at 1:1 half of them, and at 1:3 a quarter.
What are the limits of Risk-Reward Ratio?
A large ratio does not make a trade good, because a far target is also less likely to be hit. The ratio only matters together with how often the setup actually wins, and costs raise the win rate needed.
How does Tickfloor use Risk-Reward Ratio?
Tickfloor's trade reads place the target at a fixed multiple of the stop distance.