A risk-to-reward ratio compares a trade’s planned loss with its possible gain. It helps you describe a setup, but it cannot tell you whether the target will be reached or whether the trade will make money. The CMC Markets trading guide provides a general definition of the term. Explore more trading basics in the BlockBriefing Learn hub.
What is a risk-to-reward ratio?
The risk-to-reward ratio compares the amount a trader could lose if a trade reaches its planned exit with the potential gain if it reaches a target. A trade risking $20 to target $60 has a 1:3 risk-to-reward ratio. This is a planning estimate, not a promise that either outcome will occur.
Calculate risk and reward before a trade
First define an entry price, an invalidation or stop level, and a profit target. For a long position, planned risk per unit is entry minus stop; potential reward per unit is target minus entry. Divide potential reward by planned risk to express reward relative to risk. For short positions, reverse the price distances appropriately. Include position size, fees and realistic slippage when estimating the actual money at risk.
A worked example
Suppose a hypothetical asset is entered at $100, with a planned stop at $95 and target at $115. The planned risk is $5 per unit and the potential reward is $15, giving a 1:3 risk-to-reward ratio. If the position contains 10 units, the nominal price risk is $50 and the nominal target gain is $150 before fees, slippage or other execution effects.
Why a favorable ratio can still lose money
A trade with a high potential reward can still be unattractive if the target is unlikely to be reached. Win rate, average loss, average gain, fees and changing market conditions all affect results. Stops may execute at a worse price during fast markets or gaps. Historical backtests can also overstate performance if they ignore realistic costs or use information that would not have been available at the time.
Use a consistent process
Decide in advance what would invalidate the trade idea, calculate position size from a loss limit you can tolerate, and check whether the target makes sense in the market context. Avoid moving a stop simply to avoid accepting a loss. Track outcomes over a meaningful sample rather than judging a method from one trade. Never risk money you cannot afford to lose.
Frequently asked questions
Is a 1:3 ratio always better than 1:1?
No. The outcome depends on the probability of reaching targets and stops, execution costs and the strategy’s actual performance.
Does a stop-loss guarantee the exact loss amount?
No. Fast markets, gaps and slippage can cause execution at a different price.
Related Learn guides
Continue learning with these related explainers: How to Calculate Crypto Profit and Loss; How to Read Crypto Charts for Beginners; Dollar-Cost Averaging (DCA) in Crypto: How It Works.
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