How to calculate the risk/reward ratio?

BULLSAGE Trader by MyBotIA · Published on 5 November 2026 · Educational content prepared with AI assistance, calculations checked. No personalised financial advice.

The formula, for buying and for selling

For a buy, the ratio is (target − entry) ÷ (entry − stop). For a short sale (selling first to profit from a fall), the directions are reversed: (entry − target) ÷ (stop − entry). The denominator is the distance to the stop, in other words the theoretical risk per unit; the numerator is the planned gain per unit.

The break-even win rate

If each winning trade earns R times the risk and each losing trade costs exactly one times the risk, the result is zero when the proportion of winners equals 1 ÷ (1 + R). With a ratio of 1, you need 50% winners; with 2, about 33%; with 3, 25%; with 0.5, about 67%.

The expectancy per trade, expressed in multiples of the risk, is: win rate × R − loss rate. With 40% winners and a ratio of 2: 0.4 × 2 − 0.6 = +0.2 R per trade, i.e. €20 for a risk of €100. With 30% winners, the same ratio gives 0.6 − 0.7 = −0.1 R. These rates are example assumptions: only a sufficiently long and honest track record allows you to estimate one.

Fees reduce the real ratio

What the ratio does not say

A distant target improves the ratio on paper, but it is generally reached less often. A ratio of 5 is therefore not “better” than a ratio of 2 without information on how often it succeeds. Likewise, moving the stop closer to improve the ratio changes the scenario: the stop must stay at the level where the idea becomes wrong, not at the one that makes the number look good. See where to place your stop-loss.

Partial exits, moving the stop or exiting at market price before the target all change the ratio actually achieved. That is why the trading journal records the real result in multiples of the planned risk, and not just the announced ratio.

Checks before keeping a scenario

• The stop matches an invalidation, not an arbitrary amount.
• The target is based on an identifiable level, not on the ratio you would like.
• The ratio is recalculated with estimated fees and slippage (the gap between the expected and the actual execution price).
• The win rate used comes from measured data, or is presented as an assumption.

The BULLSAGE calculator shows the ratio before fees from the entry, the stop and the target. To derive a quantity from it, continue with the position sizing guide.