What is a good risk/reward ratio?

Many traders want at least 1:2, making twice what they risk, but a good ratio depends on the win rate. A setup that wins most of the time can pay at 1:1; one that wins rarely needs much more.

How do you calculate the risk/reward ratio?

Divide the distance from the entry to the target by the distance from the entry to the stop. Buying at 10.00 with a stop at 9.80 and a target at 10.60 is 0.60 ÷ 0.20, a ratio of 1:3.

What is an R multiple in trading?

A trade's result divided by the amount it risked to the stop. If you risked 100 dollars and made 250, the trade was +2.5R; if you lost 100, it was −1R.

The money you stand to lose if the trade hits its stop: the distance from entry to stop times the number of shares. It is the unit every result is measured in.

Why do traders measure results in R instead of dollars?

R compares trades of different sizes and prices on one scale, and shows whether a setup pays for its risk. A dollar total can hide a bad process behind one large trade.

Glossary

Risk/reward and R multiple

Risk/reward compares what a trade can lose, from the entry to the stop, with what it aims to make, from the entry to the target. The R multiple turns that into a unit: 1R is the money you risk to your stop, and every result is counted in R, so a trade that makes twice its risk is +2R and a full stop-out is −1R.

Why it matters to a small-cap momentum trader

Small caps let you trade 300 shares of one stock and 3,000 of another in the same morning, so dollar profits and losses are hard to compare. R makes them comparable: a 90-dollar loss on a trade that risked 100 is −0.9R, wherever the stock traded. It also makes the plan honest. If a setup's targets pay 0.8R and you win half the time, it loses money however good the entries feel. Thinking in R is how traders decide which setups are worth taking and how big to trade them.

The arithmetic

1R. (Entry − stop) × shares for a long; (stop − entry) × shares for a short. It is the loss if the stop fills exactly.

R multiple of a result. Profit or loss ÷ 1R.

Risk/reward of a plan. (Target − entry) ÷ (entry − stop), often written 1:3 or as a reward of 3R.

Expectancy. (Win rate × average win in R) − (loss rate × average loss in R). Above zero, the setup has paid over the trades measured.

Position size. Shares = the dollars you will risk ÷ (entry − stop).

Slippage and gaps can make a loss bigger than 1R, which is why the real results of a setup sit a little below its plan. The free position size calculator works out the shares from your risk and stop.

R in Hindsight Markets

Every journal trade with a stop shows its 1R and its R multiple, and Most in your favour and Most against you are shown in R beside the dollars. 1R is the risk the trade was planned with when you placed the stop; a trade with no stop has no R until you add one. The R distribution card shows how your results spread across wins and losses.

A worked example: one trade, then a week

An illustration with made-up numbers, not a real stock, trader or week.

The plan. Buy at 6.05, stop at 5.85, target 6.65. Risk = 0.20 a share, reward = 0.60 a share, so risk/reward is 1:3.

The size. To risk 60 dollars: 60 ÷ 0.20 = 300 shares. 1R = 60 dollars.

The result. The stock gaps through the stop and fills at 5.81. Loss = 300 × (6.05 − 5.81) = 72 dollars, so the result is −72 ÷ 60 = −1.2R.

The week. Ten trades: four winners averaging +2.5R, six losers averaging −1.1R. Expectancy = 0.4 × 2.5 − 0.6 × 1.1 = 1.0 − 0.66 = +0.34R a trade. It won only 40% of the time and still made money.

Common mistakes traders make with risk/reward

Setting the target to fit the ratio. A 3R target is worthless if the stock has no reason to get there. Use a real level, then judge the ratio.
Moving the stop to save the trade. Widening the stop after entry changes 1R and turns a −1R loss into −2R.
Ignoring the win rate. A high ratio with a low win rate can lose, and a modest ratio with a high win rate can pay. Expectancy needs both.
Judging days in dollars. A big dollar day can be one lucky trade with big size. Results in R show whether the process paid.

Common questions

What is a good risk/reward ratio?: Many traders want at least 1:2, making twice what they risk, but a good ratio depends on the win rate. A setup that wins most of the time can pay at 1:1; one that wins rarely needs much more.
How do you calculate the risk/reward ratio?: Divide the distance from the entry to the target by the distance from the entry to the stop. Buying at 10.00 with a stop at 9.80 and a target at 10.60 is 0.60 ÷ 0.20, a ratio of 1:3.
What is an R multiple in trading?: A trade's result divided by the amount it risked to the stop. If you risked 100 dollars and made 250, the trade was +2.5R; if you lost 100, it was −1R.
What is 1R?: The money you stand to lose if the trade hits its stop: the distance from entry to stop times the number of shares. It is the unit every result is measured in.
Why do traders measure results in R instead of dollars?: R compares trades of different sizes and prices on one scale, and shows whether a setup pays for its risk. A dollar total can hide a bad process behind one large trade.

How to practise it in Hindsight Markets

Before a past trading day, decide what 1R is in dollars, and size each trade with the position size calculator.
Enter with a bracket order, so the stop and target are set the moment you are in.
Trade the morning without moving a stop further away.
Open the journal: every trade shows its 1R and R multiple, and Most in your favour in R shows what the target could have paid.
File the trades under a playbook, and after a few days see which setups pay in R.

Practice this on a real past day in Hindsight Markets

Trade a real past day with a stop on every trade, and let the journal give every result in R.