risk-reward ratio - definition

The risk-reward ratio (RR) is the potential profit of a trade divided by its potential loss, measured before entry. It quantifies how many units of reward you expect for each unit of risk. RR applies to any directional trade with a defined stop-loss and take-profit; it is meaningless for scalping or grid strategies where exits are not pre-set.

R:R = (take-profit price − entry price) / (entry price − stop-loss price)

For short trades, reverse the numerator and denominator: (entry − stop) / (entry − take-profit).

A trader buys AUD/USD at 0.6500, sets a stop-loss at 0.6470 (30 pips risk), and a take-profit at 0.6560 (60 pips reward). The risk-reward ratio is 60 ÷ 30 = 2:1 (R-multiple of 2). For every AUD 1 risked, the trader expects AUD 2 in return.

• JPY pairs: Pips are calculated to two decimal places (e.g., USD/JPY at 150.00). The formula uses the same pip count, but the monetary value per pip differs from AUD-based pairs.
• ASIC regulation: Australian brokers must display RR alongside win-rate in client performance reports. A high RR does not guarantee profitability if the win-rate is below the breakeven threshold.
• Non-standard convention: Some traders quote RR as 1:2 (risk:reward) instead of 2:1. Always confirm the order—risk first or reward first.

• stop-loss
• take-profit
• win-rate
• position sizing