Risk–reward ratio: planned loss, target profit and their limits

Read the two sides before you read the ratio

A risk–reward ratio compares a planned loss with a profit target. Here, loss:profit is 1:2: a planned loss of 5 for a target profit of 10. Reverse the order and profit:loss is 2:1; divide profit by loss and the quotient is 2. None of these numbers tells you the chance of winning or guarantees the loss will stop at 5.

The labels matter more than the abbreviation. A bare “2:1 risk–reward” can be read in opposite ways. Check which amount comes first and whether the writer means a plan for a future outcome or average gains and losses already recorded. This guide uses planned amounts, not a tested strategy or a recommendation to trade.

Work through a hypothetical 100, 95 and 110

Assume one unit of a simple instrument whose profit or loss changes one-for-one with its price. The hypothetical purchase price is 100, the planned stop price is 95 and the target price is 110. There is no currency or actual security behind these numbers. The calculation assumes the stated entry and exit prices and excludes costs.

The target profit is a possible result at a specified price. Calling it “expected profit” would confuse that target with a probability-weighted expected value. The plan has not supplied a probability.

A stop price is not a guaranteed maximum loss

In US stock-market education, a stop order becomes a market order when triggered, so the execution price can differ substantially from the stop price. A stop-limit order adds a price condition but may not execute. These are different limits, not two ways to guarantee an exit. The source does not establish that a particular FX service or prediction market offers either order.

The SEC’s stock-order bulletin and FINRA’s explanation of stop orders also explain why execution risk matters when prices move quickly. Firms can differ in the events that trigger an order and the order types they offer. A price written into a worksheet does not settle those questions.

A gap can skip intermediate prices. An older ASIC booklet illustrates how this can lead to a worse fill or no fill, depending on the order type, in a CFD context. That is a mechanism example, not evidence of current Australian law, current consumer protections or worldwide product availability.

The ratio does not supply a win rate

For one narrow model, suppose the only possible net results are exactly +10 and −5, with no fees or other costs. Let p be the probability of +10; the probability of −5 is then 1 − p. Expected value is the sum of each result multiplied by its probability: 10p − 5(1 − p) = 15p − 5.

The 40% and 20% figures are stipulated for comparison. They are not measured win rates and cannot be inferred from the 1:2 ratio. Even the positive expected value at 40% does not guarantee a profit on one attempt or over a fixed number of attempts. Different fills or additional outcomes would also change this model.

Separate costs, position units and account risk

The example leaves out fees, spreads, slippage, taxes and financing or borrowing costs. Actual net gains and losses depend on the applicable costs and execution. The break-even win rate from this cost-free model is therefore not a sufficient threshold for a real strategy.

A planned loss of 5 per unit is also different from losing 5% of an account. Multiplying the number of identical units changes the planned amount; expressing it as a percentage requires an account-value denominator as well. Neither is supplied by the ratio. This guide gives no recommended quantity, fixed account-risk percentage or leverage level.

Different products have different loss mechanisms

US securities-margin education explains that borrowing to buy securities can leave an investor with losses greater than the cash initially invested and a debt. SEC stock-short-selling education describes theoretically unlimited losses as a stock price rises. These are product-specific examples; they do not mean that every product called “short,” or every event contract, has unlimited loss.

A simple event contract’s payout rules are a separate subject from this entry–stop–target worksheet. Its costs, collateral and order features must be understood on their own terms. A larger target-to-stop ratio alone establishes neither a better trade nor suitability or eligibility to participate.

Common questions

Is a 33% win rate enough for a 1:2 ratio?

Not in the exact cost-free model with only +10 and −5 outcomes. Its break-even probability is 5 ÷ (10 + 5) = 1/3, or 33⅓%, not exactly 33%. At 33%, the expected value is 0.33 × 10 − 0.67 × 5 = −0.05 per unit. That threshold belongs only to those fixed outcomes and assumptions; it is not a forecast or a guaranteed profitable trading rule.

Is 1:2 the same as 2:1?

Only when the labels are reversed. Planned loss:target profit of 1:2 and target profit:planned loss of 2:1 describe the same amounts. Two ratios written in the same order would instead describe different plans.

Is there a best risk–reward ratio?

This calculation does not identify one. Raising a target changes a planned payoff, but the ratio alone says nothing about the probability of reaching it, actual costs or execution. It cannot establish that a plan is suitable for someone.

Is this an interactive risk–reward calculator?

No. These are fixed worked examples for understanding the calculation and its limits. They do not evaluate a security, account or personal financial situation.

Sources and scope

Source material was checked on 17 October 2026. The examples and arithmetic are hypothetical. The stock sources below describe their own order and loss mechanisms; they do not determine a reader’s legal eligibility or establish features for every market.

1. FINRA: Stop Orders—Factors to Consider During Volatile Markets (26 March 2025). Stock-order execution and nonexecution risks.
2. SEC: Stop, Stop-Limit, and Trailing Stop Orders (13 July 2017; displayed update 18 August 2026). Staff education, not a Commission rule.
3. SEC: An Introduction to Short Sales (29 October 2015; displayed update 9 September 2026). Uncovered stock-short exposure.
4. SEC: Understanding Margin Accounts (10 June 2021). Securities borrowing and losses above initial cash; no current margin-rule details are asserted here.
5. CME Group: The 2% Rule. Used to identify ratio-label ambiguity and distinguish position amounts from account amounts. The page’s sizing rule and trading recommendations are not adopted.
6. OpenStax Statistics, section 4.2. Expected-value definition; the fixed two-outcome examples here are separately calculated.
7. ASIC: Thinking of trading contracts for difference?, printed page 18. Historical CFD gapping explanation only; no current regulatory or availability conclusion.