Risk to Reward Ratio
The risk to reward ratio compares the amount of capital you risk per trade against the potential profit. A 1:2 ratio means risking $100 to make $200.
In depth
The risk to reward ratio is a critical metric that defines your trade's mathematical probability of profitability. It answers a simple question: how much profit do I need to make this risk worthwhile? If you risk $1, you need a realistic potential return of at least $1 or higher to justify the position. Most professional traders target ratios between 1:2 and 1:3 minimum.
Calculating your risk to reward ratio requires three pieces of information. First, determine your entry price and stop loss level, which defines your maximum loss. Second, identify your profit target based on support and resistance levels. Third, divide the potential profit by the potential loss. For example: if you buy at $100 with a $95 stop loss, you risk $5 per share. If your target is $110, you stand to gain $10, creating a 1:2 ratio.
The power of this metric lies in position mathematics. A trader with a 1:2 ratio needs only 50% winning trades to break even, accounting for commissions. A trader with a 1:3 ratio needs just 33% winners. This is why professional traders obsess over their ratio. It creates a mathematical edge that compounds over hundreds of trades, regardless of win rate.
Why it matters
Your risk to reward ratio is the foundation of a sustainable trading system. Without favorable ratios, even a high win rate won't generate profits. One bad trade with poor risk management can eliminate weeks of gains.
Traders who ignore this metric often overtrade and accept unfavorable setups. They take 1:1 or worse ratios repeatedly, hoping high win rates will compensate. This approach fails mathematically. Professional traders filter opportunities ruthlessly, only executing trades with predetermined acceptable ratios. This discipline separates profitable traders from broke ones.
TraderLog's trade analysis tools automatically calculate your risk to reward ratio for every position. You input your entry, stop loss, and target prices, and the platform computes your ratio instantly. This removes calculation errors and keeps you accountable to your rules.
Over time, TraderLog's analytics dashboard reveals your average risk to reward ratio across all trades. You can see if you're actually trading the ratios you intended. Many traders discover they're accepting worse ratios than planned. This data drives real improvement. You can filter trades by ratio and analyze which setups perform best for your strategy.
Frequently asked questions
Most professional traders target a minimum 1:2 ratio. This means risking $1 to potentially make $2. Higher ratios like 1:3 or 1:4 are even better. The best ratio depends on your win rate and market conditions. Even a 1:1 ratio can work if you win 70%+ of trades, but this is extremely difficult to achieve consistently.
Subtract your stop loss price from your entry price to find your risk amount. Subtract your entry price from your profit target to find your reward amount. Divide the reward by the risk. Example: entry $50, stop $48, target $54. Risk is $2, reward is $4, so your ratio is 1:2 ($4 divided by $2 equals 2).
Technically yes, but it's mathematically disadvantageous. You need a 50%+ win rate just to break even after fees. Most traders cannot sustain this consistently. Worse ratios like 1:0.5 require 70%+ win rates to profit. It's better to wait for setups offering at least 1:2 ratios and trade fewer times with higher quality entries.
Track Risk to Reward Ratio in your trading journal.
TraderLog calculates Risk to Reward Ratio automatically across your trade history, and shows you exactly when and why it changes.