Risk to Reward Ratio Explained: How to Calculate It From Real Levels
To calculate a risk to reward ratio, measure the distance from your entry to your stop, measure the distance from your entry to your target, then divide the reward distance by the risk distance. Risking one unit to gain three is a 3:1 trade. The division is easy. The real work is choosing both distances from levels on the chart.
How to calculate risk reward ratio
Risk is entry minus stop for a long trade. Reward is target minus entry. The ratio is reward divided by risk. Written reward-first, a trade that risks one to make three is 3:1. Some people write it risk-first as 1:3, which means the same thing. Pick one convention and stay with it so your notes never contradict each other.
The formula is the same for a short trade with the directions flipped: risk is the stop minus the entry, and reward is the entry minus the target. If you trade options or futures, check your broker’s rules and the contract specifications for how price moves translate into dollars, because the ratio of distances and the ratio of dollars can differ.
Illustrative example, not a real trade or a recommendation: a long entry at 50.00, a stop at 49.50, and a target at 51.50. Risk is 0.50, reward is 1.50, and 1.50 divided by 0.50 gives 3:1.
Where the stop and target come from
Most explanations stop at the formula, as if the arithmetic were the hard part. It is not. Both numbers need a reason to exist on the chart. A stop belongs just beyond a level that, if broken, tells you the idea was wrong. A target belongs at the next level where price has previously stalled or reversed, such as a prior swing high, a shelf of repeated rejections, or a clear area of supply. The mechanics of the stop side are covered in the article on what a stop loss is and where to place it.
When both ends are anchored to levels, the ratio is a description of the trade the chart actually offers. Sometimes that is 3:1. Sometimes it is 1.4:1. Either answer is useful because it is honest.
Why the target has to be a level
A common shortcut goes like this. A trader decides to take only setups of 3:1 or better. They have an entry and a stop, so they multiply the stop distance by three, add it to the entry, and call the result the target. That price has no history. Nothing happened there, and no sellers have shown up there before. It is a number produced by a ratio and dressed up as a target.
A level is the only thing on a price action chart that records where price behaved differently in the past. If the nearest real resistance only gives you 1.4:1, then 1.4:1 is the true ratio for that trade. Forcing a larger target does not improve the trade. It only improves the number in your notes while the real exit sits at a price with nothing behind it.
Risk to reward ratio and win rate
The ratio matters because it sets how often you need to be right to break even. The break-even win rate is risk divided by the sum of risk and reward, before commissions and slippage. At 1:1 you need to win half your trades just to break even. At 2:1 you need roughly one in three. At 3:1 you need one in four. Fees and slippage push those figures higher, and none of this is a forecast of results.
Illustrative example, not a real trade or a recommendation: risk 100 per trade over ten trades. At 3:1 with four winners and six losers, the winners return 1,200 and the losers cost 600, a net of 600. At 1:1 with seven winners and three losers, the net is 400. Change the second case to risking 300 to make 100 and the same seven winners return 700 against 900 in losses, a net loss of 200.
That is the whole point. Win rate tells you how often you are right. The ratio tells you what being right is worth against what being wrong costs. Tracking only one of them hides half the picture. A high win rate paired with a poor ratio can still lose money, and a modest win rate paired with a healthy ratio can still work. Whether a given edge holds up in live trading depends on execution, costs, and discipline, and trading involves risk of loss.
What is a good risk to reward ratio
There is no universal number. A ratio only means something alongside how often the setup works, and that is something you learn by logging your own trades over a meaningful sample. A 6:1 trade whose target price has never respected is worse than a 1.5:1 trade whose target sits at a level that has turned price away repeatedly. Treat the ratio as a measurement of the trade you found, not a filter you apply before looking at the chart.
Calculate it before you enter
The ratio does its job only when it is written down before entry, next to the stop and target. Calculated afterward, it becomes a story about a trade that already happened. Calculated beforehand, it is a quick filter. Two setups can look equally clean and still be worth very different amounts once the ratios sit side by side. The one with more room to the next real level earns the slot. The one with a target so close that a single ordinary pullback would tag it can be skipped, not because the level reading was wrong, but because the arithmetic was thin.
I mark the levels for both stop and target before I am ever in a position. In Static, the free daily chart room run by Draw Lines Make Money, that is the habit on display. Most days in the room are quiet, and the levels shared are for educational discussion, not signals. The room is free to join, needs no card, and you can leave any time.
Quick answers
How to calculate risk reward ratio
Divide the distance from entry to target by the distance from entry to stop. If the target is three times as far away as the stop, the ratio is 3:1.
Is a higher risk to reward ratio always better
No. A large ratio built on an untested target is a guess. A smaller ratio built on a level that has held before is easier to trust.
Can you make money with a low win rate
Mathematically, a ratio above 1:1 lowers the win rate needed to break even. In practice, costs, slippage, and inconsistent execution all matter, and losses remain possible.
When should you calculate the ratio
Before entering, with the stop and target already placed on chart levels. Doing it afterward only explains a result instead of shaping the decision.
Summary
A risk to reward ratio is the reward distance divided by the risk distance, and it is only as honest as the levels behind it. Anchor the stop and target to real chart levels, write the number down before entry, and read it alongside your win rate rather than instead of it.
Want to practice marking levels with other traders? The free chart room is free to join, and you can leave whenever it stops being useful.
Disclosure: that’s an affiliate link — I may earn a commission at no extra cost to you. The chart room is free to join.
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