Risk Reward Target: definition
A risk reward target is a planned relationship between the amount of risk you would tolerate if price moves against you and the amount of reward you would aim for if price moves in your favor. In forex order planning, “risk” is commonly measured as the difference between an entry price and a stop-loss level, while “reward” is commonly measured as the difference between the entry price and a take-profit level.
It is helpful to treat this as a format for describing your intention, not as a forecast. A risk reward target expresses how much gain you are aiming for relative to how much loss you are willing to accept, given specific order levels.
How it works in forex
Core mechanics
Most risk reward target calculations start with three assumed prices: Entry, Stop-loss, and Take-profit. From those, you compute:
- Risk distance = distance from entry to stop-loss
- Reward distance = distance from entry to take-profit
- Risk reward ratio = Reward distance ÷ Risk distance
For example, assume the entry is at 1.1000, the stop-loss is at 1.0950, and the take-profit is at 1.1100. Then:
- Risk distance = 1.1000 − 1.0950 = 0.0050
- Reward distance = 1.1100 − 1.1000 = 0.0100
- Risk reward ratio = 0.0100 ÷ 0.0050 = 2.0
A ratio of 2.0 means the planned reward distance is twice the planned risk distance, based only on these assumed levels.
Where “target” fits
In everyday trading language, “target” can refer to the take-profit level itself, but in the phrase risk reward target it usually describes the planned relationship (the ratio or the intended comparison), not a guaranteed outcome. Even if the take-profit is placed to match a chosen ratio, the actual realized result depends on whether price reaches those levels and at what prices.
Distinguishing adjacent concepts
It can help to separate risk reward targets from nearby ideas:
- Stop-loss placement focuses on the level where you would exit to limit downside.
- Take-profit placement focuses on the level where you would exit to capture an upside.
- Risk reward target links both by describing the relationship between their distances.
Realistic limitation scenario
Possible failure mode: execution costs and level slippage
Assume the same planned entry, stop-loss, and take-profit levels as above. In practice, execution can differ from the assumed prices due to spreads, slippage, and latency. If the effective execution price is worse than expected, your realized risk can increase and your realized reward can decrease.
A key point is that costs and execution effects can change the relationship you planned. Your ratio may look correct when calculated from chart levels, but real fills can alter the distances in currency terms.
Another limitation: reaching levels is uncertain
Even with a well-defined risk reward target, price may:
- move partway and then reverse before hitting the take-profit,
- move quickly and hit the stop-loss,
- gap or jump between levels.
Because of that uncertainty, risk reward targets describe how the plan is set up, not what will happen.
Verification and what to check next
To independently verify whether a risk reward target is being used correctly, you can check:
- The entry, stop-loss, and take-profit levels used in the calculation.
- The computed risk distance, reward distance, and ratio.
- Whether the calculation considers the instrument’s quote conventions and the impact of trading costs on the final amounts.
If you want to go one step further, compare two plans that share the same risk amount but use different reward levels. This shows how risk reward targets change the trade’s planned expectation while still leaving outcome uncertainty unchanged.