Reward-to-risk ratio

A comparison of two price distances, both fixed before the outcome is known. The denominator is the distance from the intended entry to the protective level, and the numerator is the distance from that entry to the intended target. The result is quoted as a multiple, so a plan whose target sits three times as far away as its protective level carries a ratio of three to one. Both figures are distances in price. Neither is a probability, and the ratio contains no information about how often either level is reached.

That is why the ratio is meaningless in isolation and is conventionally paired with a hit rate to give expectancy, the average result per trade once both are accounted for. The arithmetic cuts against the intuition the ratio invites: a distant target reached rarely and a near one reached often can carry identical expectancy, so a large ratio is not evidence of a sound method and a small one is not evidence against it. Minimum ratios cited in trading literature are conventions of that literature and not findings from it.

The denominator is where the term misleads most. The distance to a protective level is a plan, not a loss. A stop loss order becomes executable when the market reaches its level and is then filled at the next available price, so in a gapping or fast market the realised loss can exceed the distance the ratio was calculated on, and the ratio a position actually delivered can be worse than the one it was planned with. The ratio also says nothing about exposure across several positions at once, which is a separate calculation.