What a risk to reward ratio means

A risk to reward ratio compares two distances you chose before the trade: how far price can go against the entry before the stop, and how far it must go in your favor to reach the target. Divide the planned gain by the planned loss. The result is the ratio.

The division

Use the same units on both sides. Points, dollars per unit, or a percent of price all work if both distances use that unit. A target 10 points above a long entry and a stop 10 points below it is 10 divided by 10, which is 1. A target 10 points away and a stop 5 points away is 10 divided by 5, which is 2.

People sometimes write the pair in the other order, risk first, as 1 to 2. This page uses the single number: reward divided by risk. A ratio of 2 means the planned gain is twice the planned loss. A ratio of 1 means they match.

These figures are a worked example, not a recorded run. Both plans use a target 10 points from the entry. The first stop is also 10 points away, so the planned risk is 10 and the ratio is 1. The second stop is 5 points away, so the planned risk is 5 and the ratio is 2. The picture is that arithmetic. It is not a record of a trade that reached the target.

What the ratio leaves out

The ratio is a description of the plan. It is silent on how often the target is hit before the stop. A plan with a ratio of 2 can still lose money if the stop is hit often enough. A plan with a ratio of 1 can make money if the target is hit often enough. Why win rate is not enough puts that frequency next to the size of the gain and the loss.

Moving the stop closer, while leaving the target where it is, raises the ratio and shortens the distance the price has to travel to reach the stop. That is a change to the plan, not a reason to prefer the closer stop. This page does not recommend a ratio.

The planned distances also assume the exit happens at those prices. On a stock stop order, the SEC bulletin on stop orders says the stop price triggers a market order, and the fill can differ from the stop. When the fill is worse than the stop, the realized loss is larger than the planned risk, and the realized ratio is worse than the one on the plan.

What Tradee stores

Tradee stores a stop price and a take-profit price on the modeled position. It does not store a risk to reward ratio. You get the ratio by dividing the two distances yourself.

Those prices are part of the modeled book. They are not exchange orders. What a stop loss does explains the stop side. Size the loss before the trade uses the stop distance to choose how many units to hold. The ratio does not choose the size. The accepted dollar loss and the stop distance do.