How risk/reward and R-multiple work
One R is the planned loss from entry to stop. Reward is the distance from entry to target. Dividing reward distance by risk distance makes setups comparable across prices and instruments: a 10-point target with a 5-point stop is 2R, just like a $1 target with a $0.50 stop. Long and short trades use opposite price ordering, but the distance ratio is identical.
risk distance = |entry − stop|
reward distance = |target − entry|
R multiple = reward distance ÷ risk distance
breakeven win rate = 1 ÷ (1 + R multiple)
expectancy (R/trade) = p × R − (1 − p)Breakeven win rate is the useful consequence of the ratio. A 1R target needs 50% wins, 2R needs 33.3%, and 3R needs 25% before costs. Expectancy combines that payoff with an observed win rate. A system winning 40% at 2R has expected value of 0.40 × 2 − 0.60 = +0.20R per trade. That is an estimate, not a guarantee, and it is only as credible as the sample and fill assumptions behind the win rate.
Worked long and short examples
For a long entry at 100, stop at 95, and target at 110, risk distance is 5 and reward distance is 10. The setup is 2:1 or +2R at target, with a 33.3% breakeven win rate. If account risk is $100, the planned target profit is $200 before costs. The calculator does not size the units; use the position size calculator for that next step.
For a short entry at 100, stop at 105, and target at 90, the same distances produce the same 2R result. Direction changes which price is above entry, not the math. A stop that crosses entry or a target placed on the loss side is rejected because it no longer describes the selected trade direction.
R-multiple and breakeven reference
| Reward/risk | Target | Breakeven win rate |
|---|---|---|
| 0.5 : 1 | +0.5R | 66.7% |
| 1 : 1 | +1.0R | 50.0% |
| 1.5 : 1 | +1.5R | 40.0% |
| 2 : 1 | +2.0R | 33.3% |
| 3 : 1 | +3.0R | 25.0% |
| 4 : 1 | +4.0R | 20.0% |
| 5 : 1 | +5.0R | 16.7% |
Why an attractive ratio is not an edge
Targets farther away are reached less often. Choosing 5R on paper does not create positive expectancy if market structure supports only 1R before reversal. Stops also have to reflect an invalidation point rather than the amount a trader wants to lose. Use price structure to define entry, stop, and target; then use the ratio to decide whether the setup deserves capital. After losses, the drawdown recovery calculator shows why uncontrolled R compounds nonlinearly. If both payoff and probability are measured honestly, the Kelly calculator compares theoretical bankroll fractions.
Frequently asked questions
Why can a high risk/reward ratio still lose money?
A distant target usually lowers the win rate. A 4R setup needs only 20% wins to break even before costs, but it loses money if the real win rate is lower. Ratio and frequency must be measured together, using fills that could actually occur.
What is the tradeoff between win rate and risk/reward?
Closer targets tend to win more often but pay fewer R; farther targets tend to pay more but occur less often. Neither side is automatically superior. Positive expectancy comes from the combination of payoff, win probability, costs, and consistent execution.
Where should a profit target be placed?
Place it where the trade thesis expects liquidity or structure to matter, not where a desired R number happens to land. If a logical target produces an unattractive ratio, the correct response may be to skip the trade or seek a better entry.
Does moving a stop change the R-multiple?
Yes. R is defined from the planned or initial risk distance, so moving the stop changes remaining risk but should not rewrite historical performance. Trade journals normally preserve initial R and separately record stop adjustments, realized R, slippage, and partial exits.