Calculating the ratio
The risk-to-reward ratio can be calculated by dividing potential risk by potential reward.
For example, a trade risking $100 for a potential profit of $200 has a ratio of 1:2.
Different ratios
A 1:1 setup offers approximately the same potential reward as risk. A 1:2 setup aims for twice the potential reward, while a 1:3 setup aims for three times the potential reward.
A larger ratio is not automatically better. The target must still be realistic based on market structure, volatility, and the trading strategy.
Win rate and expectancy
A strategy with a larger average reward may be able to remain profitable with a lower win rate. However, a large theoretical target is not useful if the market rarely reaches it.
Traders should evaluate actual historical results rather than relying only on planned ratios.
Potential problems
A trade may appear to offer a very attractive ratio but have a low probability of reaching the target. Spread, commissions, slippage, and changing market conditions can also affect the real result.