What Is Risk Reward and Stop Distance?

Direct answer: what risk reward and stop distance mean

Risk reward and stop distance are related risk-and-exit measurements used in forex to describe the size of potential loss versus potential gain.

Stop distance is the price distance between your entry and your protective stop level (the level that, if reached, ends the trade to limit loss).
Risk reward is a way to compare potential risk (loss if the stop is reached) to potential reward (gain if price reaches an exit/target before the stop).

Together, they help you translate an idea like “I will risk a limited amount” into specific distances on a chart.

Mechanism and definition: how they work together in forex

In many forex discussions, risk reward is expressed as a ratio:

Risk reward ratio = (potential reward) ÷ (potential risk)

To compute the ratio, you need stable inputs that are chosen before the trade:

Entry price: where you expect price to be.
Stop level: where your protective stop sits.
Exit/target level: where you plan to take profit.

Then you translate distances into amounts. The exact “amount” depends on contract size and how your platform calculates profit and loss, but the distance logic is the same.

Stop distance is the “against you” part:

If price moves from entry to the stop level, the stop distance has been covered.

Reward distance is the “in your favor” part:

If price moves from entry to the target level, the reward distance has been covered.

A key point is that risk reward is not a prediction. It is a comparison based on the levels you choose (entry, stop, target). If the stop and target levels are unchanged, the ratio stays the same, even though market movement may still lead to different outcomes.

Example with clear assumptions (no live data)

Assume you set three levels on a chart:

Entry: 1.2000
Stop: 1.1980
Target: 1.2040

Assumptions for the example:

You measure distance using simple price differences.

Then:

Stop distance = 1.2000 − 1.1980 = 0.0020
Reward distance = 1.2040 − 1.2000 = 0.0040
Risk reward ratio = 0.0040 ÷ 0.0020 = 2

This tells you the target distance is twice the stop distance, under these chosen levels. It does not guarantee either level will be reached first.

Limitations and risks: where the concept can fail

Several material limitations can reduce how well risk reward and stop distance describe real results in forex:

Execution and stop triggering may not match chart levels Even if a stop is set, fast markets can cause the executed price to differ from the displayed stop level. This can make the realized loss larger than implied by the stop distance.
Spreads and trading costs can change the net outcome Forex trading involves costs such as spreads. Those costs affect profit and loss, so a ratio based only on price distances may not match the net result after costs.
Market path matters, not just the endpoints Risk reward comparisons are based on whether the stop or target is hit first. Price can move toward the target, then reverse and hit the stop.
Level selection assumptions If entry, stop, or target levels are estimated (for example, using a reference level or a calculation), errors in those choices directly change the stop distance and the risk reward ratio.
Historical relationships do not ensure future outcomes Even if similar setups often appeared before, the future order of events and the effectiveness of any stop placement can differ.

Verification and next question: what you can check independently

To verify your understanding without relying on live prices, check these items on your own charting or platform documentation:

Can you clearly identify the entry, stop level, and exit level you are using?
Do you compute stop distance as the absolute difference between entry and stop?
Do you compute risk reward as (reward distance) ÷ (stop distance), or in your platform’s risk/reward terms?
Do you account for costs and possible execution differences?

A helpful next question is whether the platform you use defines “risk” and “reward” strictly by price distance or includes contract sizing and cost effects in its displayed calculations.