Direct answer
In forex, the risk reward ratio compares your planned reward to your planned risk: Risk:Reward (R:R) = Reward ÷ Risk. To calculate it, you first measure how far price is from your entry to your stop-loss (risk) and from your entry to your take-profit/target (reward). Then divide reward distance by risk distance.
How it works (definitions and inputs)
Define the levels
- Entry price: where the trade is planned to start.
- Stop-loss level: where the planned loss would be limited.
- Target level: where the planned gain would be taken.
Measure risk and reward consistently
Choose a single way to express distance, such as:
- Price distance (difference in the currency pair price), or
- Pips (a common forex distance measure).
Compute absolute distances from the entry:
- Risk = distance(entry, stop-loss)
- Reward = distance(entry, target)
Using absolute distances helps avoid sign confusion. The ratio should be based on consistent units.
Compute the ratio
- Risk reward ratio = Reward ÷ Risk
Example structure:
- If reward is 30 pips and risk is 10 pips, then R:R = 30 ÷ 10 = 3.
Example and verification checks
Example (pip-based)
Assume a plan with:
- entry to stop-loss distance = 12 pips
- entry to target distance = 24 pips
Then:
- Risk reward ratio = 24 ÷ 12 = 2
Checks to avoid common calculation mistakes
- Units match: If risk is measured in pips, reward must also be measured in pips.
- Risk must not be zero: If stop-loss equals entry, the ratio is undefined.
- Distances must be direction-independent: Use absolute distances so the ratio compares magnitudes.
- The ratio is about the plan: It uses chosen levels, not future results.
Limitations, risks, and what you can verify independently
- It does not predict outcomes: A ratio is computed from selected entry/stop/target levels, but it cannot confirm that reward will be reached or that stop-loss will be hit.
- Execution and spread matter: Real fills may differ from the assumed levels due to spreads, slippage, and liquidity, which can change the realized risk and reward distances.
- Market volatility can dominate: Even with a higher ratio, adverse price movement can still occur before the target is reached.
You can independently verify your calculation by recomputing distances using the same entry, stop-loss, and target levels you chose, then applying Reward ÷ Risk with consistent units.