Direct answer
A worked example of risk reward and stop distance is a fully numeric scenario where you assume an entry price, a stop price (or stop distance), and a target price. Then you compute:
- stop distance (how far the stop is from entry),
- risk (the loss corresponding to that distance),
- reward (the gain corresponding to the distance from entry to target), and
- risk-to-reward (reward divided by risk).
Because stop distance and target distance are choices, the result is a model of your plan, not a guarantee about outcomes.
Mechanism or definition
Stop distance is the price movement from your entry to where the position would be closed for loss (the stop level). In practice, you can specify it as:
- Price distance (e.g., entry 1.1000 to stop 1.0980 is 0.0020), or
- Units of movement (e.g., pips or ticks, if your market uses them).
Risk is the planned loss if price reaches the stop level, assuming your execution occurs at the stop level and ignoring costs.
Reward is the planned gain if price reaches the target level, assuming execution at the target level and ignoring costs.
Risk-to-reward ratio is typically computed as:
- R:R = Reward / Risk A larger ratio means the model’s reward potential is larger relative to the model’s risk exposure, given the same entry and stop assumptions.
Evidence or example (worked scenario with stated assumptions)
Below is one self-contained scenario. It uses simple price-distance math to keep the assumptions explicit.
Assumptions (state these before calculating):
- You enter at 1.1000.
- Your stop is at 1.0980.
- Your target is at 1.1040.
- You are buying (so entry → stop is downward, entry → target is upward).
- You measure distances in price units (you do not convert to pips here).
- Planned risk and reward use only price distance; you ignore spreads, commissions, and slippage.
- You assume the stop and target can be executed exactly at those levels.
Step 1: Compute stop distance
- Stop distance = entry − stop = 1.1000 − 1.0980 = 0.0020
Step 2: Compute reward distance
- Reward distance = target − entry = 1.1040 − 1.1000 = 0.0040
Step 3: Compute risk and reward (price-distance form) If we treat risk and reward as proportional to distance (same position size and contract value per unit movement), then:
- Risk ∝ 0.0020
- Reward ∝ 0.0040
Step 4: Compute risk-to-reward ratio
- R:R = Reward / Risk = 0.0040 / 0.0020 = 2.0
Interpretation (as a model, not a prediction):
- Under these assumptions, the plan’s reward potential is 2× the plan’s risk exposure.
Sensitivity check (why stop distance matters): If you keep entry at 1.1000 and target at 1.1040, but move the stop from 1.0980 to 1.0990:
- New stop distance = 1.1000 − 1.0990 = 0.0010
- Reward distance stays 0.0040
- New R:R = 0.0040 / 0.0010 = 4.0 This shows that changing stop distance changes the ratio even if your target is unchanged.
Limitations and risks (what can break the example)
- Execution may not occur at your stop/target levels. Gaps, fast moves, and order filling can produce different realized prices than the plan.
- Costs are ignored in the simplified ratio. Spreads, commissions, and financing (where applicable) can reduce realized profit and increase realized loss relative to a pure price-distance model.
- The ratio does not describe probability. A higher R:R does not automatically mean trades are more likely to reach the target first.
- Slippage can change both risk and reward. Even if the stop triggers, the filled price can worsen the loss; similarly, target fills can be less favorable.
- Historical relationships don’t fix future results. Even if past behavior made a certain style “work” statistically, it does not ensure the same for new market conditions.
Verification or next question
To independently verify the concept from the worked example, check that you can reproduce each arithmetic step:
- stop distance = entry − stop,
- reward distance = target − entry,
- risk-to-reward = reward distance ÷ stop distance (under the stated proportionality assumption).
A helpful next question is: What position sizing or contract-value conversion would be needed if you want the example in currency terms instead of price-distance terms?