Risk-Reward Ratio

Risk-Reward Ratio is the prospective gain on a trade divided by the prospective loss, calculated from entry price, stop loss, and take profit. A 3:1 R:R means risking $1 to make $3; a 2:1 R:R risks $1 to make $2. R:R is set at the moment of entry by the trade's stop and target placement, it is not an outcome but a structural property of the setup.

R:R interacts with win rate to determine expectancy. A strategy with 30% win rate and 3:1 R:R has positive expectancy: (0.30 × 3) − (0.70 × 1) = +0.20 R per trade. A strategy with 60% win rate and 1:1 R:R has the same expectancy. There's no "correct" R:R, the right value depends on the setup's probabilistic structure. Trend-continuation setups (breakouts, pullbacks) typically tolerate 2:1–5:1 targets because trends extend; mean-reversion setups rarely achieve above 1.5:1 because they exit near the mean before further extension. Strategies requiring unrealistic R:R (targets at 8:1+) tend to have poor fill rates even with nominally strong win rates.