Direct answer
A Reward Risk Calculation (often expressed as a reward-to-risk ratio, RR) needs inputs that describe (1) where the trade starts, (2) where the potential gain is measured to, (3) where the potential loss is measured to, and (4) what you treat as costs. The “sources” of these inputs are not the market in real time; they come from your predefined plan (entry, stop, target levels) and from the execution terms you can verify (such as spread and fees), plus any clearly stated assumptions used to translate price moves into net amounts.
Mechanism and definitions: what the calculation measures
Reward-to-risk compares two distances expressed in the same units:
- Reward distance: how far price must move in your favor from the starting level to the reward exit (commonly a target level).
- Risk distance: how far price must move against you from the starting level to the risk exit (commonly a stop level).
A common form is:
- RR ratio = reward distance ÷ risk distance
To compute “distance,” you must choose consistent measurement:
- Price distance (e.g., in pips or points), or
- Monetary distance (profit potential divided by loss potential).
Input sources (conceptual):
- Starting level (entry): taken from your plan (the level you intend to enter). This is a plan variable, not an observed outcome.
- Reward exit level (target): taken from your plan (where you intend to exit for profit).
- Risk exit level (stop): taken from your plan (where you intend to limit loss).
- Position size and contract specification (if converting to money): taken from your chosen size and the contract rules of your execution venue (how a given price move maps to profit/loss).
- Costs (if aiming for net reward/risk): taken from the execution terms you can verify, such as spreads and fees.
Inputs required, plus assumptions and “where they come from”
Below is a practical checklist of inputs you can verify for a self-contained calculation.
1) The entry reference
- What you need: the entry price level you are using as the reference.
- Assumption: you can represent your entry by a single level (or define a rule, like “use the intended entry,” not the eventual fill).
- Source: your trade plan (intended entry) or your recorded fill price if you are evaluating an executed trade.
2) The stop reference
- What you need: the stop level that defines the maximum intended loss boundary.
- Assumption: the stop level is the one you use to measure risk distance.
- Source: your trade plan (stop level) or recorded execution details if analyzing after the fact.
3) The target reference
- What you need: the target level that defines the reward boundary.
- Assumption: the reward exit level is the point used to measure reward distance.
- Source: your trade plan (target level) or recorded exit details if analyzing after the fact.
4) The measurement unit and conversion method
- What you need: a decision: compute RR from price distances or monetary outcomes.
- Assumption: all inputs use the same unit system.
- Source: your own calculation method (this is not “found” in the market; it is chosen by the calculator).
5) Position size and contract mapping (if using money)
- What you need: enough contract information to convert a price move into profit/loss for your chosen size.
- Assumption: the mapping you use matches how your execution venue calculates P/L.
- Source: venue documentation for contract terms plus your chosen position size.
6) Costs model (if you want net reward/risk)
- What you need: an explicit statement of which costs to include.
- Assumption: you either (a) ignore costs for a “pure price-distance RR,” or (b) adjust for costs using verifiable terms.
- Source: execution terms you can verify (for example, fee schedule and typical spread behavior), plus your stated simplification.
7) Consistency rule for direction
- What you need: clearly define reward and risk for long vs short.
- Assumption: the sign conventions are handled correctly (reward must increase when your trade moves in your favor).
- Source: your own definition of measurement direction.
Evidence or example (self-contained, with assumptions)
Example using price distances only (no real-time data assumed):
- You define entry at 1.2000.
- You define a stop at 1.1950.
- You define a target at 1.2100.