Risk to Reward Ratio (R:R): Formula, Win Rate and Examples

What is the risk to reward ratio?

The risk to reward ratio, written R:R, compares what a trade loses if its stop is hit with what it gains at its target. Both are measured from the entry. A ratio of 1 : 2 means the target sits twice as far from the entry as the stop.

Three notations describe the same trade, which is where most of the confusion starts. Risk to reward puts the risk first: 1 : 2. Reward to risk puts the reward first: 2 : 1, or 2R. A fraction of risk over reward gives 0.5, the form Investopedia’s definition uses, which is why some guides say a lower number is better. This guide writes risk first throughout.

The ratio is a plan, fixed before the entry. It describes the shape of one trade, not how often trades like it work. That second number, the win rate, is what turns a ratio into a strategy or into a slow leak.

How do you calculate the risk to reward ratio?

Subtract the stop from the entry to get the risk per coin, and the entry from the target to get the reward. Divide the reward by the risk and write the result as 1 : that number. On a short the stop sits above the entry and the target below it, so both subtractions flip.

1. Mark the entry price you can actually fill at.
2. Mark the stop where the trade idea is proven wrong.
3. Mark the first target the chart supports.
4. Divide the reward distance by the risk distance.
5. Size the position from the stop, never from the target.

Two worked examples on BTC/USDT

The ratio does not depend on position size. A 0.1 BTC position and a 2 BTC position on the same levels both carry 1 : 1.25. Size only decides how much money one unit of risk represents. That is why the guide to position sizing under volatility starts from the stop distance, never the target.

What win rate does each ratio need?

The break-even win rate is 1 divided by (1 plus the reward multiple). A 1 : 1 trade must win 50% of the time just to stand still. A 1 : 2 needs 33.3%, and a 1 : 3 needs 25%. Fees push every one of those numbers higher, so treat the table below as the floor.

Read the table in both directions. A method that wins 40% of its trades needs better than 1 : 1.5 before it covers a single fee. A method built on 1 : 3 can lose three trades in every four and still break even. A quoted win rate means little until the ratio behind it is known, the point made in what a quoted win rate hides.

Expectancy: the ratio and the win rate together

Expectancy is the average result per trade, measured in units of risk. One unit, written 1R, is the amount a trade loses at its stop. The formula multiplies the win rate by the reward multiple, then subtracts the loss rate. For the first row below: 0.5 × 1.25 is 0.625, and taking away the 0.5 loss rate leaves 0.125R.

The third row is the trap that a big ratio hides. A 1 : 3 plan looks generous until the target turns out to be reached one time in five. A positive expectancy is a requirement for a method, not a promise. It describes the average over many trades, and any real sample can run below it for a long stretch.

What is a good risk to reward ratio?

No single ratio is good. A ratio is good when the win rate it needs sits below the win rate the setup actually achieves, after costs. A 1 : 1.5 that reaches its target half the time does better than a 1 : 4 that almost never gets there.

Many swing traders treat 1 : 2 as a planning floor. On short trades that hit more often, 1 : 1 to 1 : 1.5 is common. Those are habits, not laws. The target has to sit where the chart gives a reason to take profit, such as a level where price stalled before. A target placed wherever the ratio looks best is a wish with a price on it.

The same discipline applies when reading someone else’s trade. A signal that states its entry, stop loss and take profit lets the ratio be checked before any money moves. A signal that leaves one of the three out cannot be measured at all.

How does scaling in change the real ratio?

Scaling in splits one planned position into several buy limits below the first entry. Each extra order fills only while price moves against the trade. The position is therefore largest when the trade is failing and smallest when it works, so the real ratio falls below the planned one.

Take the long from the table above: entry 90,750, hard stop 89,750, first target 92,000, a planned 1 : 1.25. One entry puts the whole planned size in at 90,750. A four-limit ladder splits the same size into four equal orders at 90,750, 90,500, 90,250 and 90,000.

What each path does, per 1 BTC of planned size

The ladder makes 312.50 when the trade works straight away. It loses 625 when the trade fails, from an average entry of 90,375: about 1 : 0.5. Its break-even win rate jumps from 44.4% to 66.7%. Scaling in is heaviest into a loss and lightest into a win.

The ladder has one better path. Every order fills first, almost at the stop, then price turns and reaches the target, for 1,625 against 1,250. That path needs the trade to go against the plan before it works.

The effect follows a simple rule. With N equal orders spaced evenly from the entry toward the stop, the ratio shrinks by a factor of 2 ÷ (N + 1). Two orders keep two thirds of the planned ratio, four orders keep 40% of it. The ladder re-run below does the arithmetic on any plan.

Dollar-cost averaging is a different idea and the arithmetic above does not apply to it. It buys a fixed amount on a schedule, over months, outside any single trade with a stop. The ladder is a decision inside one trade. The walk-through of averaging into a losing trade shows how it grows the size exactly where the plan said to exit.

Planned versus realized: fees, funding and slippage

A ratio drawn on a chart ignores what it costs to trade it. Take a taker fee of 0.05% on each side, an illustration only, since fees differ by exchange and account tier. On the 90,750 long that costs about 91 for the round trip at the target and about 90 at the stop.

The reward shrinks to about 1,159 and the risk grows to about 1,090. The plan now carries about 1 : 1.06, and its break-even win rate rises from 44.4% to about 48.5%. The shorter the stop distance, the larger the share fees take, which is why tight scalps feel costs first.

• Funding on perpetual futures is paid or received at set intervals, often every eight hours.
• A stop-market order in a fast move can fill beyond the stop price.
• A partial exit at the first target changes the average win and the average loss.

Holding a long for days while funding runs positive is a steady cost the chart never displays. The live funding rates board shows where that pressure sits. Partial exits are part of most plans with several targets, as in the 4-Part Signal. They change the realized ratio too, so the ratio worth tracking is the one the closed trades actually produced.

Does leverage change the risk to reward ratio?

No. Leverage changes how much margin a position ties up and where the exchange would liquidate it. The distances from the entry to the stop and to the target stay the same, so the ratio stays the same. What leverage changes is the money at stake per point, which is why size comes from the stop.

The liquidation price must sit beyond the stop. If it sits between the entry and the stop, the exchange closes the position first. That happens on a move the plan was built to survive, with a liquidation fee on top. High leverage on a wide stop is the usual way this happens.

Five mistakes that distort the ratio

Each of these keeps a healthy ratio on paper while the trade underneath it changes:

1. Moving the target further away to make the ratio look better.
2. Widening the stop after entry, which raises the risk the size was built on.
3. Quoting the ratio to the last target instead of the first.
4. Splitting the entry into a ladder without re-running the ratio.
5. Ignoring fees and funding on a trade with a short stop distance.

The fix is the same every time: redraw the plan, recompute the ratio, then resize. With several positions open at once, add their dollar risks together as well, the habit covered in tracking total risk across open trades.

New to the terms above? The crypto glossary defines them in plain English. Each ParadiseFamilyVIP call is posted with its entry, hard stop and targets already set.

Crypto trading involves substantial risk and is not suitable for everyone. Nothing here is financial advice; it is education only. Never risk more than you can afford to lose.