Trading risk · Guide
Risk-Reward Ratio and Break-Even Win Rate
A risk-reward ratio compares the amount a trade could lose with the amount it could gain if the planned stop and target are reached.
If a trade risks $3 per share to make $6 per share, the setup has a 1:2 risk-to-reward ratio, or a 2.00-to-1 reward-to-risk ratio.
Risk ÷ (Risk + Reward) = 3 ÷ (3 + 6) = 33.33%This is not the probability that the trade will win. It is the win rate required to break even across a sufficiently large set of trades with the same average payoff, before costs.
What is a risk-reward ratio?
The ratio compares two planned outcomes: risk is the loss between entry and stop, while reward is the gain between entry and target.
For a long trade
Risk per share = Entry price − Stop price Reward per share = Target price − Entry price
For a short trade
Risk per share = Stop price − Entry price Reward per share = Entry price − Target price
A general formula works for either direction:
Risk per unit = |Entry price − Stop price| Reward per unit = |Target price − Entry price|
The ratio describes planned payoff, not probability. Two trades can both have a 2:1 ratio while having different volatility, liquidity and execution risk.
Risk-to-reward vs reward-to-risk
Trading platforms and articles do not always write the ratio in the same order.
Risk-to-reward: 1:2 Reward-to-risk: 2:1
BasisPilot reports reward-to-risk, so the result reads as potential reward for each $1 of planned risk.
Reward-to-risk = Reward ÷ Risk $6 ÷ $3 = 2.00
Always check which number is presented first when comparing tools or trading records.
How to calculate risk-reward ratio
A complete calculation starts with entry, stop and target prices.
Long-trade example
Entry: $50 Stop: $47 Target: $56
Risk per share = $50 − $47 = $3 Reward per share = $56 − $50 = $6 Reward-to-risk = $6 ÷ $3 = 2.00
The trade can be written as risk-to-reward 1:2 or reward-to-risk 2.00:1.
Short-trade example
Entry: $80 Stop: $84 Target: $72
Risk per share = $84 − $80 = $4 Reward per share = $80 − $72 = $8 Reward-to-risk = $8 ÷ $4 = 2.00
How to calculate break-even win rate
The break-even win rate is the minimum percentage of winning trades required for average wins to offset average losses.
Break-even win rate = Risk ÷ (Risk + Reward) or Break-even win rate = 1 ÷ (1 + Reward-to-risk)
For a 2.00 reward-to-risk ratio:
1 ÷ (1 + 2) = 33.33%
Why the formula works
Consider 100 trades that risk 1R to make 2R. At a 33.33% win rate, winners produce 66.67R and losers lose 66.67R, for a net result of zero before costs.
The formula assumes full winners, full losers, no partial exits, no slippage or fees, and a large enough sample for the averages to be meaningful.
Risk-reward and break-even win-rate table
The following theoretical rates exclude fees and slippage.
| Reward-to-risk | Risk-to-reward | Break-even win rate |
|---|---|---|
| 0.50 | 1:0.5 | 66.67% |
| 1.00 | 1:1 | 50.00% |
| 1.50 | 1:1.5 | 40.00% |
| 2.00 | 1:2 | 33.33% |
| 3.00 | 1:3 | 25.00% |
| 4.00 | 1:4 | 20.00% |
| 5.00 | 1:5 | 16.67% |
A lower theoretical break-even rate does not automatically make a setup better. Farther targets may be reached less often, and tighter stops may be triggered more frequently.
How fees and slippage change the result
Commissions, spreads, slippage, financing, borrow costs and currency conversion can make a price-only calculation look too favorable.
Example with fees
Entry $50 · Stop $47 · Target $56 · Position 100 shares · Costs $10 Gross loss = $300 Gross profit = $600 Net loss = $310 Net win = $590 Break-even = $310 ÷ ($310 + $590) = 34.44%
Example with stop slippage
If the planned stop is $47 but the actual execution is $46.80, the price loss is $320. With the same $10 cost, the net loss is $330 and the adjusted break-even rate is 35.87%.
A stop price is a planning input, not a guaranteed exit price. See the SEC stop-order bulletin and FINRA order-type guidance.
What is a good risk-reward ratio?
There is no universal ratio that makes a trade or strategy good. Evaluate it together with actual win rate, average realized win and loss, fees, slippage, liquidity, frequency, losing streaks and position size.
A 2:1 ratio can still lose money
(30% × 2R) − (70% × 1R) = −0.10R per trade
A 1:1 ratio can be profitable
(55% × 1R) − (45% × 1R) = +0.10R per trade
A useful ratio comes from a repeatable process, remains positive after realistic costs, is supported by enough historical trades, and fits the account-risk limit. Do not move stops or targets simply to manufacture a preferred ratio.
Risk-reward ratio vs trade expectancy
Risk-reward measures payoff structure. Trade expectancy combines payoff with probability.
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)
| Strategy | Win rate | Expectancy before costs |
|---|---|---|
| A | 30% | −0.10R |
| B | 40% | +0.20R |
Both strategies can have a 2R average winner and 1R average loser, yet their expected outcomes differ because their win rates differ.
How position size fits into the calculation
Risk-reward answers whether potential payoff is large enough relative to planned loss. Position size answers how many shares fit within the maximum dollar loss.
Position size = Maximum risk amount ÷ Risk per share $100 ÷ $3 = 33.33 shares
If fractional shares are unavailable, round down to 33 shares. Position size changes total dollars at risk and reward, but not the price-based ratio.
Calculate shares from an account-risk limit →Common risk-reward mistakes
- Treating the ratio as a probability. A 3:1 ratio only describes planned payoff.
- Choosing a target to create a preferred ratio. Targets need a market-based rationale.
- Tightening the stop to improve the ratio. A closer stop may be triggered by ordinary movement.
- Ignoring trading costs. Small costs can materially change the break-even rate.
- Assuming the stop is guaranteed. A stop is a trigger, not necessarily the fill price.
- Ignoring position size. A favorable ratio does not protect an oversized position.
- Judging from one trade. One result is almost no evidence about a process.
- Mixing planned and realized statistics. Compare like with like.
Common questions
What does a 1:2 risk-reward ratio mean?
The planned reward is twice the planned risk. A trade risking $100 to make $200 has a 1:2 risk-to-reward ratio, or a 2.00 reward-to-risk multiple.
What win rate is needed for a 2:1 ratio?
Before fees and slippage, 1 ÷ (1 + 2) = 33.33%. The required rate is higher after costs.
Can a trader be profitable below a 50% win rate?
Yes, if average winners are sufficiently larger than average losers and the edge survives costs and execution.
Does position size change the ratio?
No. It changes dollar outcomes, not the price-based ratio.
Does a stop-loss guarantee the planned loss?
No. Gaps, liquidity and fast markets can produce a fill worse than the trigger price.
How should fees be included?
Add round-trip costs to a losing outcome, subtract them from a winning outcome, then calculate the rate using net average loss and net average win.
Related tools
BasisPilot provides educational calculations and does not provide personalized investment, tax, legal or trading advice.