Direct answer
Risk reward ratio (often written as R:R) in forex is a way to express the relationship between a planned loss and a planned gain for a position. It does this by converting your chosen price levels—such as an entry price, a stop level, and a target level—into distances (or monetary amounts) and then forming a ratio.
Because it is based on planned levels rather than what the market will do, the ratio describes the setup you defined, not the outcome. Real results can differ due to execution (for example, slippage) and costs (for example, spread and commissions), which are not automatically captured unless you include them in your calculation.
Mechanism: what the ratio actually measures
Define the two quantities
To compute risk reward ratio, you first define:
- Risk (RISK): the amount you expect to lose if price reaches your stop level.
- Reward (REWARD): the amount you expect to gain if price reaches your target level.
How you express these depends on what you use for your comparison:
- In price-distance terms: you use the distance from entry to stop and the distance from entry to target.
- In money terms: you use the potential profit and potential loss in account currency.
Both approaches can represent the same idea, but the exact numeric ratio can change if spreads, commissions, or different contract specifications are included differently.
Typical formula
A common way to state risk reward ratio is:
- Risk Reward Ratio = REWARD ÷ RISK
If REWARD is twice RISK, then the setup has a ratio of 2:1 (because REWARD ÷ RISK = 2). If REWARD equals RISK, the ratio is 1:1.
Inputs needed
At minimum, you need:
- An entry price (the level you assume the position is initiated)
- A stop price (the level you assume defines the loss point)
- A target price (the level you assume defines the gain point)
- A consistent method to translate price movement into risk and reward (either distance-only or money-based)
For money-based risk and reward, you also need assumptions about position size and the instrument’s pricing structure so that “one unit of price movement” maps to a predictable profit/loss amount.
Evidence or example: a realistic calculation flow
Below is a calculation sequence that you can replicate independently without assuming any live prices.
Scenario setup (with explicit assumptions)
Assume you choose:
- Entry price: E
- Stop price: S
- Target price: T
Assume price movement direction has been handled consistently (for example, for a long position, S is below E and T is above E). If your position is short, the relationships between the levels swap, but the method remains consistent: you measure the magnitude of the move to stop and the magnitude of the move to target.
Step 1: compute distances
- Risk distance = |E − S|
- Reward distance = |T − E|
Step 2: compute the ratio
- R:R = Reward distance ÷ Risk distance
If |T − E| = 1.5 × |E − S|, then R:R = 1.5. You might describe that as 1.5:1.
Step 3 (optional): translate distances to money
If you convert to money terms, you apply the instrument’s conversion logic and your position size. In that case:
- Risk (money) = (Risk distance) × (value-per-price-unit for your position size)
- Reward (money) = (Reward distance) × (value-per-price-unit for your position size)
- R:R = Reward (money) ÷ Risk (money)
In many simple explanations, using the same value-per-price-unit makes the distance-based and money-based ratio match. But if spreads, commissions, or different execution pricing are handled inconsistently, you can end up with a different ratio than you expected.
Limitations and risks: what can break the idea
Planned levels are not guaranteed to be filled
Risk reward ratio assumes your stop and target correspond to executed prices. In real trading conditions, the effective exit price can differ from the stop or target level.
Examples include:
- Slippage: price moves between order placement and execution.
- Liquidity gaps: quick moves around news or thin trading hours can produce worse-than-expected fills.
Material limitation: if realized loss becomes larger than the “risk” you used, then the realized ratio effectively changes even if your stated R:R was unchanged.
Costs and spread can shift risk and reward
Forex positions are typically affected by spread and may also have commissions depending on the provider and account type. If you ignore those costs in your R:R calculation, your stated risk and reward are “gross,” not “net.”
Material limitation: net profit and net loss after costs can reduce reward relative to risk, even when the price-distance ratio looks the same.
Market context does not make outcomes predictable
Risk reward ratio is a description of your setup, not a predictor of whether the market will move to your target. Even if a ratio is high, the trade can still fail if price reaches the stop first.
Material limitation: historical relationships between patterns and outcomes do not ensure future results, and changing volatility regimes can alter how often price reaches targets versus stops.
Verification failure mode: mixing definitions
A common mistake is to compute the ratio using inconsistent definitions, such as:
- Using one entry price but a different stop/target price
- Using distance on one chart but money-based assumptions on another
- Forgetting that long and short positions require consistent sign handling
If you mix these inputs, the ratio you report may not reflect the setup you actually executed.
Verification and next question
Independent verification checklist
To independently verify your own R:R, recompute it from the exact values you used:
- Identify the entry, stop, and target levels you assumed.
- Confirm you are using the correct direction logic (long vs short) with consistent magnitudes.
- Decide whether you are using distance-based or money-based risk and reward.
- If you want a more realistic description, incorporate costs and consider whether your effective execution prices match your planned levels.
Key next question
A useful next question to ask alongside R:R is: How does your chosen R:R interact with the probability of reaching the target before the stop? That involves assumptions about price movement behavior and execution quality—topics that are separate from the pure ratio calculation.