What Is a Risk-Reward Ratio?

The risk-reward ratio is the fastest way to tell a planned trade from a hopeful one. If you can't say it before you click, you're hoping.

This is for the trader who wants the math on their side across a hundred trades. Looking for the setup that "can't miss"... the ratio doesn't care how you feel.

How do you calculate a risk reward ratio?

Measure two price distances and divide one by the other.

• Risk is the distance from entry to the stop, and the stop sits at the invalidation level.
• Reward is the distance from entry to the target, and the target comes from chart structure: the next level, range edge or pool of liquidity.
• Ratio is reward divided by risk.

One example from our own training: a Bitcoin long with entry at 61,100, stop at 59,930 and target at 66,600. Risk is 1,170, reward is 5,500, so the ratio is 1:4.7. For every dollar risked at the stop, the target is worth $4.70.

Order matters: stop first, target from the chart, ratio read off the result. Never the starting point.

Why does the risk reward ratio matter more than being right?

It sets the break-even hit rate: 1 divided by (1 plus the reward multiple), before fees and slippage. At 1:1 you need to be right half the time to stay level. At 1:2, about a third. At 1:3, a quarter.

That's the whole story, right? The higher the ratio, the more often you can be wrong and still stand still.

Same chart, two entries: which risk reward ratio passes?

Illustrative numbers. Bitcoin is ranging between support at 60,000 and resistance at 61,400.

Trade A, taken in the middle of the range. Entry 60,700. The idea is wrong below support, so the stop is 59,950. The target is resistance at 61,400. Risk is 750, reward is 700, a ratio of about 1:0.9. It fails, badly.

Trade B, taken after the level is taken. The trader waits. Price sweeps the lows to 59,800 and closes back above 60,000. Entry 60,050, stop at the sweep low of 59,800, target still 61,400. Risk is 250, reward is 1,350, a ratio of 1:5.4. It passes.

Same chart, same target. Only the patience changed. When a setup can't reach 1:3, the problem is usually the entry, not the target. That's the equal lows strategy doing its job: entering where other traders' stops get hit puts your entry close to your invalidation.

How strict are we about the risk reward ratio?

Very. It's a pass or fail gate called the 1:3 filter. Chad Wittfeldt's rule: "I don't take any trades under one to three." If the stop at invalidation and a target at real structure can't produce 1:3, the trade gets skipped. As he puts it, "Most trades that you might see shouldn't be taken."

The check lives in decision five of the Decision Protocol, after the stop and size are known. It also has to respect timeframe imposition: a 15-minute pattern doesn't earn a weekly target just because the bigger number makes the ratio pass. Higher-timeframe swing setups often show 1:6 or more because the structure supports it, not because the target got stretched.

How do traders fake a good risk reward ratio?

They force it. Want the trade, see 1:2, pull the stop closer or push the target further until the tool reads 1:3. Now the stop isn't at invalidation and the target isn't at structure. Same weak trade, better label. At the end of the day, facts don't care about your feelings, and neither does the chart.

The other mistake is reading the ratio as a forecast. A 1:3 trade is not more likely to work than a 1:1 trade. It's a filter that keeps the math on your side across many trades, as long as every stop is honored at its planned size.

What risk reward ratio should you try before your next trade?

Say the ratio out loud before you place the order. Under 1:3? Close the chart and let price come to you.

The filter is explained in full in the risk reward filter. For how the ratio fits into setups, see crypto trading strategies, and for where the check sits among the seven decisions, read the Decision Protocol guide.

Source: Investor.gov's What is Risk? makes the general point that higher expected returns come with higher risk. The ratio is how a trader measures that trade-off on one position.