TRADING PERFORMANCE GLOSSARY
Risk/reward ratio
The reward-to-risk ratio compares potential reward per unit with planned risk per unit between an entry, stop, and target. It describes payoff geometry, not the probability that either level will be reached.
Updated August 31, 2026 · Educational information onlyTHE FORMULA
Reward-to-risk ratio = potential reward per unit ÷ risk per unit
Use consistent units and state how breakevens, fees, and incomplete trades are treated.
WORKED EXAMPLE
See the calculation.
A long entry at $50, stop at $48, and target at $56 risks $2 for a potential $6 reward, a 3:1 reward-to-risk ratio.
HOW TO INTERPRET IT
Ask what the number leaves out.
- Validate that the stop and target are on the correct side of entry for the trade direction.
- The theoretical break-even win rate is risk ÷ (risk + reward) before costs.
- Actual exits, slippage, gaps, partial fills, and fees can differ from the plan.
COMMON MISTAKES
Keep comparisons honest.
- Calling risk-to-reward and reward-to-risk the same ratio without labeling it.
- Treating a distant target as equally probable.
- Ignoring execution and transaction costs.