Risk/reward ratio: how to calculate it before you trade

Short answer: the risk/reward ratio is the distance from entry to target divided by the distance from entry to invalidation. If you risk 5 per unit to be able to make 10 per unit, the ratio is 1:2. The number does not tell you whether the trade will win. It tells you what the trade needs in order to make sense.

1. Three numbers you need first

A usable setup has three levels: an entry zone, an invalidation level (stop-loss) and at least one target. Without all three you cannot calculate the ratio, and you are effectively guessing. That is why the structure of a signal matters more than its direction.

The formula is simple: R:R = (target − entry) ÷ (entry − invalidation) for a long. For a short, flip the signs so the distances are always positive.

2. A worked example (not a recommendation)

Imagine an idea with entry at 100, invalidation at 95 and a target at 115. The risk is 5 and the possible gain is 15, so the ratio is 1:3. If the target were 105 instead, the ratio would be 1:1. Same entry and same stop, but a very different trade. That is why you first judge whether the target is realistic, and only then whether the ratio looks reasonable.

3. R multiples: think in units of risk

Many traders measure outcomes in R, where 1R is the amount you risked at entry. If the stop is hit, the result is −1R. If a target twice as far away as the stop is hit, the result is +2R. The benefit is that you can compare trades across sizes and assets. The amount you risk is set by your position size, which we cover in our note on position sizing.

4. How often does a trade need to work?

The ratio sets the share of trades that must reach target before you break even. This is pure arithmetic, before fees:

• At 1:1, about half of trades need to work (50%).
• At 1:2, about one third (33%).
• At 1:3, about one quarter (25%).

That does not make a high ratio easy to benefit from. A distant target is reached less often. Always judge the ratio together with how likely it is that price actually gets to the level. Cryptomanden does not publish win rates or live performance, so use these numbers as arithmetic and not as a promise.

5. Fees and slippage eat into the ratio

Trading fees, spread and slippage make your real ratio worse than the one you drew on the chart. A setup that shows 1:1.2 on paper can end up below 1:1 once costs are included. On short timeframes costs matter most because distances are small. Always assume a pessimistic entry and a pessimistic exit.

6. A high ratio can hide a bad stop

It is tempting to move the stop closer to get a nicer number. But a stop inside ordinary noise gets hit by random moves, and then the ratio is only pretty in the spreadsheet. Invalidation belongs where the idea is actually wrong, not where it gives the best R:R.

7. A checklist before you click

• Can I point to entry, invalidation and target, and were all three set from the market rather than from the ratio I want?
• What is the ratio once fees and slippage are included?
• Is the target a level where price has reacted before, or just a round number?
• Does the size match the amount I decided in advance to risk?
• What will I do if the stop is hit? Is the answer clear before I enter?

What this note is not

This is not a recommendation of any particular ratio and not a performance summary. The examples use round numbers to show the method. A Cryptomanden signal is decision support with entry, invalidation and targets. Whether you trade, and how much, is your responsibility.

Trading involves risk. Past results do not guarantee future results. This article is education and general market information only, not personal financial advice.