Risk to reward
Reward-to-risk compares what a trade can make at its target with what it loses at its stop. 1R is the amount you risk.
Key points
- Break-even win rate before costs = 1 ÷ (1 + R): 50% at 1:1, 33.3% at 1:2, 25% at 1:3.
- Expectancy per trade = win rate × average win − loss rate × average loss (in R).
- Hypothetical: 40% winners at 2R and 60% losers at 1R gives 0.4 × 2 − 0.6 × 1 = +0.2R per trade before costs.
- Bigger targets need fewer winners but are usually hit less often. There is no free lunch.
- Costs (spread, commission, slippage) shrink every R, most of all on small scalping targets.
How traders use it
- Measure entry to stop (1R) and entry to target.
- Take the target from the chart: the next opposing level, not a fixed 1:3.
- Skip trades where the room to the next level is below your minimum.
Watch out
- Moving the target further away mid-trade.
- Taking winners at 0.5R while letting losers run to 1R.
- Judging a method on ten trades.
Key line: A win rate means nothing without R. Break-even win rate = 1 ÷ (1 + R).