Risk/Reward Ratio
Learn what risk/reward measures, what it does not measure, and how it interacts with win rate and expectancy.
What risk/reward measures
Risk/reward compares the amount planned to be lost if a trade fails with the amount targeted if it succeeds. If $100 is at risk for a $200 target, the planned reward is twice the planned risk, often described as 2:1 reward-to-risk.
Why the ratio alone is incomplete
A large target is not automatically better. A strategy that targets five units of reward for one unit of risk may win rarely; another may target less but win more often. The useful question is how payoff size combines with win probability and actual execution over a meaningful sample.
Expectancy combines win rate, average win and average loss. Risk/reward is only one component.
Planned versus realized
Realized results can diverge from the plan because of partial exits, slippage, early exits, missed stops and changing volatility. A trading journal should therefore track both planned and realized risk/reward.