Risk-Reward Ratio: What It Means and the Break-Even Math
The risk-reward ratio compares how far a trade's target sits from the entry with how far its stop sits, so a $4 target against a $2 stop is 2:1. It does not make a trade good on its own; it sets the share of trades you must win just to break even.
The risk-reward ratio is the most quoted number in trading and one of the most misread. A 3:1 trade sounds better than a 1:1 trade. Whether it is depends entirely on how often each one gets there.
How it works
Measure two distances from the same entry price. The distance down to the stop is the risk. The distance up to the target is the reward. Divide the reward by the risk.
risk-reward ratio = (target − entry) ÷ (entry − stop)
A buy at $40.00 with a stop at $38.00 and a target at $44.00 risks $2.00 to make $4.00, which is 2:1. Traders often call the risk “1R”, so the same target is described as “2R”.
Every ratio carries a break-even hit rate. If a win pays R and a loss costs 1, the share of trades you need to win just to break even is 1 ÷ (1 + R).
- 1:1 needs 50% winners.
- 1.5:1 needs 40%.
- 2:1 needs 33.3%.
- 3:1 needs 25%.
Those are before spreads and commissions, which push every line up a little.
Why a bigger ratio is not automatically better
The ratio and the hit rate move against each other. Put the target twice as far away and the ratio doubles, but price has to travel twice as far before the stop is touched. Fewer trades get there.
So the ratio alone says nothing about profit. A 3:1 method that reaches its target 20% of the time loses money. A 1:1 method that wins 60% of the time makes money. The useful number is the one that combines both, which is expectancy.
A ratio is only as honest as the stop behind it. The stop belongs where the trade idea is proven wrong. Moving it closer to make the ratio look better makes the ratio bigger and the chance of being stopped out higher at the same time.
And the target has to be somewhere price can plausibly reach. A target beyond a level the market has turned from several times is a number on a calculator, not a plan.
A worked example
A real pick from this site’s own scanner ledger. On 13 Aug 2026 the ledger issued Merck (MRK) with a trigger at $135.05 and a stop at $129.51.
- Risk per share: $135.05 − $129.51 = $5.54. That is 1R.
- First target (1R): $135.05 + $5.54 = $140.59.
- Second target (2R): $135.05 + 2 × $5.54 = $146.13.
The trade triggered on 14 Aug and the ledger records it reaching the second target, $146.13, on 19 Aug after 4 bars: a result of +2R, which at that target is a 2:1 trade that worked.
The size comes from the same numbers. Taking a hypothetical $200 of risk, $200 ÷ $5.54 is 36 shares (rounded down). At 2R that is a gain of about $398.88 on 36 shares; stopped out, a loss of about $199.44. The risk per trade page shows that formula in full.
The original data
The site’s scanner ledger issued 16 picks between 11 and 31 Aug 2026, and every one carries its targets at exactly 1R and 2R, checked row by row against the trigger and stop. As last recorded in the ledger file (31 Aug 2026), 7 had closed: 5 stopped out at −1R, 1 reached 1R and 1 reached 2R. Three never triggered, four were still open and two were waiting.
That is 2 winners in 7 closed trades, 28.6%, for a net of −2R. With winners averaging 1.5R, the break-even hit rate was 40%, so the closed set sat well below it. Seven trades is far too few to judge the scanner, and four open positions could change the total. What it does show is the point of this page: the planned 2:1 target was fine, and the result was still decided by how often it was reached.
Across the 24,971 unique videos in the site’s finance search study, 17 put “risk-reward” or “risk to reward” in the title, from 16 channels, at a median of 41,167 views, and 5 of them passed 100,000 views. Few videos, large audiences: people search for this number far more than creators explain it.
The question: A setup offers four-to-one. Take it over a 1.5:1 setup?
Only if it reaches its target at least one time in five. Four-to-one breaks even at 20%, and a target four stops away is reached less often than one a stop and a half away. The ratio is half of the answer; your own record of how often each type gets there is the other half.
When it fails
The first failure is choosing the target to fit a ratio. A rule that says “only take 3:1 trades” tempts you to place targets wherever 3:1 lands, whether or not price has any reason to get there.
The second is shrinking the stop to improve the ratio. The trade now looks better on paper and gets stopped out by ordinary movement.
A third is ignoring costs. On a small target the spread and commission are a large share of the reward, and the real ratio is lower than the planned one.
A fourth is a ratio with no record behind it. Without a count of how often trades reach their target, the break-even hit rate cannot be checked against anything.
And a fifth is exiting early. A 2:1 plan that is regularly closed at 1R is a 1:1 method in practice, with the 50% break-even that comes with it.
Related
Expectancy combines the ratio with the hit rate into a single average result per trade. Risk per trade turns the stop distance into a position size. The stop loss page covers where the stop belongs, which is where every ratio starts. And the R-multiple calculator does the arithmetic on this page for any entry, stop and target.
The ratio is the question I ask second, not first. First I want to know where the idea is wrong, because that fixes the stop. Only then does the target tell me whether the trade is worth the risk, and if I have to stretch the target to make the ratio look good, the answer is already no.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.