Definition: what “risk reward target” means
A risk reward target is a planning relationship between two distances measured from a trade’s entry price:
- Risk: the distance from entry to the stop loss level.
- Reward target: the distance from entry to the take-profit level (or a planned “target” level).
People often summarize this relationship as a risk-reward ratio (for example, 1:2), where the first number represents planned risk and the second represents planned reward. The key point is that it describes how far price levels are from entry, not what the market will do.
Mechanism: inputs and how the worked example calculation works
To calculate a reward target using a risk-reward ratio, you need stable inputs you can verify on your chart:
- Entry price (the price you assume the order fills at).
- Stop loss level (or, equivalently, the risk distance).
- Risk-reward ratio (desired relationship between reward distance and risk distance).
Then compute:
- Risk distance = |entry − stopLoss|
- Reward distance = riskDistance × (rewardRatio)
- Target price = entry ± rewardDistance
Use “±” according to direction:
- For a long position, target is typically above entry, so you add rewardDistance.
- For a short position, target is typically below entry, so you subtract rewardDistance.
Worked example with explicit assumptions
Assumptions (state them so the math is independently checkable)
- We assume a long position.
- We assume the trade fills exactly at entry.
- We assume stop loss and target levels are expressed in the same price units as the entry.
- We ignore execution effects for the calculation (no slippage, no widening costs, and no partial fills). These ignored factors are addressed in the limitations section.
Example numbers
Assume:
- Entry price = 1.1000
- Stop loss price = 1.0950
- Desired risk-reward ratio = 1:2 (reward equals two times risk)
Step 1: Risk distance
- riskDistance = |1.1000 − 1.0950| = 0.0050
Step 2: Reward distance
- rewardDistance = 0.0050 × 2 = 0.0100
Step 3: Risk reward target (take-profit level)
- targetPrice = entry + rewardDistance
- targetPrice = 1.1000 + 0.0100 = 1.1100
So, under these assumptions, a risk reward target of 1:2 corresponds to a planned target level at 1.1100 given a stop loss at 1.0950.
What can you verify on your own?
If you pick the same entry, stop loss, and ratio, you should arrive at the same target price by repeating the three calculations above. The method is fully numerical and does not require live market data.
Limitations and risks (why the plan may not match reality)
- Execution does not guarantee planned fill prices: slippage can change the effective entry and stop loss distance, altering the realized reward.
- Costs and spreads can shift outcomes: transaction costs and wider spreads can reduce effective reward compared with the level implied by the target price.
- Distance measurement can be wrong: if the stop loss distance is mis-measured (for example, mixing pips and raw price), the computed target will be inconsistent.
- Market movement can miss or reverse: even if the target level is calculated correctly, price may not reach it, or it may reach it under conditions that make the realized result different from the simplified model.
Because of these issues, risk reward target is a planning calculation, not a prediction.
Verification and next question to consider
To independently verify your understanding, do this:
- Choose any entry and stop loss level you can see on a chart.
- Compute riskDistance, then multiply by your chosen ratio.
- Derive the targetPrice using the correct sign for long versus short.
If you want a deeper comparison, the next question is usually: what changes in the calculation if the entry is not filled at the assumed price, or if costs affect the effective risk and reward?