How to calculate risk-reward ratio

Risk = Entry − Stop Reward = Target − Entry R:R = Reward / Risk → expressed as 1 : (Reward / Risk)

For a short, swap the signs: Risk = Stop − Entry, Reward = Entry − Target. Use absolute values so the ratio is always positive.

Worked example. You long SOL at $100, set a stop at $96, and target $112.

Risk = 100 − 96 = 4 Reward = 112 − 100 = 12 R:R = 12 / 4 = 3 → 1 : 3

A 1:3 trade. The break-even win rate is 1 / (1 + 3) = 0.25, so you only need to win 25% of trades like this to come out ahead. Win more than a quarter of them and you make money.

  • •Find your risk: the absolute distance from entry to stop-loss.
  • •Find your reward: the absolute distance from entry to target.
  • •Divide reward by risk. That number is the "reward" side of a 1 : X ratio.

Why it matters for your trading

Risk-reward is the lever that decides how often you are allowed to be wrong. At 1:1 you must win more than half your trades just to tread water; at 1:3 you can be wrong three times out of four and still profit. This is why traders obsess over taking only setups with favorable ratios — it widens the margin for error that every strategy needs.

But a ratio on its own is a plan, not a result. A gorgeous 1:5 setup means nothing if price clips your stop before reaching target nine times out of ten. The honest test is expectancy: your real win rate measured against the break-even this calculator gives you. Plan the ratio here, size the trade with the position size calculator, then let your journal tell you whether the planned R:R survived contact with the market.