Risk-reward ratio (R:R)
The ratio of potential profit to potential loss on a single trade — typically expressed as 1:N where N is the multiple of risk you're targeting.
Risk-reward is the relationship between your stop distance and your target distance. A 4-point stop with an 8-point target is a 1:2 R:R. A 4-point stop with a 12-point target is a 1:3. Most disciplined strategies target at least 1:1.5 — the math doesn't work over time at less.
Why it matters: combined with win rate, R:R determines whether your strategy is mathematically profitable. A 40% win rate at 1:2 R:R is profitable (40% × 2 - 60% × 1 = +20% expectancy per trade). A 60% win rate at 1:0.5 R:R is not (60% × 0.5 - 40% × 1 = -10%). Most traders overestimate their win rate and underestimate the R:R they need.
Example
- ES setup: entry 4500, stop 4498 (8 ticks = $100 risk), target 4506 (24 ticks = $300 reward). R:R = 1:3.
Related terms
- Bracket order
A protective pair of orders — a stop loss and a profit target — attached to an entry as a one-cancels-other group.
- Position sizing
The process of determining how many contracts to trade on a given setup, typically based on a fixed-dollar risk and the stop distance.
- Drawdown buffer (safety buffer)
A self-imposed limit inside the firm's actual limit — your guardrail before the firm's guardrail.