Risk is the distance from entry to stop; reward is the distance from entry to target. A 1:2 risk/reward means losing one unit when wrong and gaining two when right before costs. The ratio is useful only when target and stop are realistic and execution costs are included.
Transparent formula
Reward/risk = |target − entry| ÷ |entry − stop|; break-even win rate = risk ÷ (risk + reward)
Worked example
A trade risking
00 to make $200 has 1:2 risk/reward and a 33.3% break-even win rate before fees. With fees and slippage, the required win rate is slightly higher.
Use this sequence
- Set entry, stop and target from a defined setup.
- Calculate dollar risk and reward.
- Convert to break-even win rate.
- Adjust for costs and partial exits.
Common mistakes
- Moving the target only to improve the ratio.
- Ignoring probability of reaching the target.
- Using gross ratio after large fees.
Verify next
Frequently asked questions
Is a 1:3 ratio always better than 1:2?
No. A farther target may be reached less often. Evaluate expectancy using both payoff and win rate.
How do fees change break-even?
They increase average loss and reduce average win, raising the required win rate.
Should partial take profit be modeled?
Yes. Use the weighted average exit price and remaining-position risk.
This page provides calculation and research frameworks, not investment, legal or tax advice.
