Risk/reward ratio
The risk/reward ratio compares a trade's targeted gain with its accepted loss, and together with the win rate determines whether a strategy has positive expectancy.
The risk/reward ratio (often written R:R) is computed before entering a position: distance from entry to target divided by distance from entry to stop loss. A trade bought at 100 with a stop at 95 and a target at 115 shows a 1-to-3 ratio: you risk 5 to aim for 15. The trade itself does not need to win often for the strategy to win : which is the whole point of this measure.
The mathematical link with the win rate
Ratio and win rate form an inseparable pair: the breakeven win rate equals 1 / (1 + R), where R is the risk/reward ratio. At 1-to-1, you must win more than half the time; at 1-to-2, about 34% is enough; at 1-to-3, 25%. Chasing a better ratio pushes the target further away and mechanically lowers the win rate: the balance between the two is specific to each strategy. Screener.Trading's backtest lets you measure this pair on historical data before risking anything.
Always derive the ratio from real technical levels (a justified stop and target), never the other way round: decreeing a target to obtain a “nice” ratio does nothing to the probabilities.
Keep exploring
- FeatureThe backtesting tool built into your screenersBacktests built from your screeners: entries, exits, fees and full metrics to judge a strategy on numbers instead of gut feeling.
- FeaturePaper trading: learn in real conditions, without the riskPlace orders, manage positions and track your P&L on fully virtual accounts : real trading practice with zero real money at stake.
- GlossaryWin rateThe win rate is the percentage of winning trades out of all trades of a strategy, to be interpreted together with the average win / average loss ratio.
- GlossaryStop lossA stop loss is an automatic loss-taking exit level, set before entering a position, which caps each trade's risk at a predetermined amount.
- GlossaryTake profitA take profit is an automatic profit-taking exit level, set before entering a position, which locks in the gain when price reaches the intended target.
- GlossaryPosition sizingPosition sizing is the share of capital committed to a trade, calibrated so that the loss if the stop is hit remains a controlled fraction of the account.
- GuideBacktesting a trading strategy, step by stepBefore risking a cent, replay your strategy on historical data: backtest setup, reading the key metrics, and the traps of over-optimization.