Crypto glossary
Risk-reward ratio
The risk-reward ratio compares a trade's potential loss, up to its stop, with its potential gain, up to its target, such as risking 1 to make 3.
To calculate it, the trader measures the distance from entry to stop-loss and from entry to take-profit. A trade entered at 100 with a stop at 95 and a target at 115 risks 5 to make 15, a ratio of 1:3, often written as 3R. Many traders only take setups above a minimum ratio, such as 1:2.
The ratio only makes sense together with the win rate. A strategy that wins 30% of the time can be profitable with 1:3 trades, while one that wins 70% can lose money if its average loss is three times its average gain. The break-even win rate equals risk divided by risk plus reward, before fees.
The figure is an estimate, not a property of the trade. Targets far away are less likely to be reached, so a high ratio usually comes with a lower win rate. Slippage, gaps and moving stops after entry also change the ratio actually realised, which is why traders review results in R multiples.
Example
A trader buys BTC at 64,000 dollars with a stop at 62,000 and a target at 70,000: risking 2,000 to make 6,000, a 1:3 ratio. She needs to win just over a quarter of such trades to break even before costs.