What is risk/reward?
If a trade risks 100 USDT to target 200 USDT, the planned reward is twice the planned risk. This is commonly described as 1:2 risk-to-reward.
Simple 1:2 example
An entry at 100 with a stop at 95 risks 5 price units. A target at 110 offers 10 price units of planned reward.
Planned R multiple
The target is +2R when the initial risk distance is defined as 1R. Realized R can differ because of fees, slippage and exit management.
Risk/reward does not work alone
A high reward target can be attractive mathematically but useless if the strategy almost never reaches it.
Likewise, a high win rate can still produce losses if losing trades are much larger than winners.
Connect risk/reward to expectancy
Strategy evaluation combines win probability, average win, average loss and costs rather than selecting trades solely because they display a large theoretical reward multiple.
Common mistakes
Forcing every setup into the same target
Different volatility and market structures can produce different path behavior.
Ignoring probability
A theoretical 1:10 target has little value if evidence shows it is rarely reached.
Using planned R instead of realized R
Execution and discretionary exits can materially change actual results.
Reward-to-risk and breakeven win rate are connected
Before costs, a strategy whose average winner is twice its average loser requires a lower win rate to break even than a strategy whose winners and losers are equal in size.
But the planned target and stop are not enough; the calculation should ultimately use realistic average realized wins and losses.
Planned R and realized R can differ
A trade planned for two units of reward per one unit of risk may exit early, slip through a stop, take partial profits or incur trading costs. Its realized payoff can therefore differ materially from the original diagram.
Strategy evaluation should use actual or realistically simulated outcomes rather than assuming every target and stop fills exactly.
Expectancy depends on the whole outcome distribution
Two strategies can share the same win rate and headline reward-to-risk target while producing different results because of partial exits, large outliers, transaction costs or different average losses.
The useful question is therefore not simply whether a trade offers a large target, but whether the complete rule set produces positive expectancy with tolerable risk across a meaningful sample.
Moving a target farther away increases the advertised reward but may also reduce how often that target is reached. Both payoff size and probability matter.
Key takeaways
- Risk/reward compares planned downside with planned upside.
- A large reward multiple does not automatically make a trade attractive.
- Win rate and payoff size must be evaluated together.
- Realized results can differ from planned R because of execution and trade management.
Sources & further reading
This lesson is educational material. Market structure, exchange rules, fees, margin requirements and derivatives mechanics can differ by venue and can change over time. Verify current rules with the venue you use.