R:R, or risk/reward ratio: formula and interpretation

R:R (risk-reward ratio) shows how much you could gain relative to what you risk. For a long: R = (take profit − entry price) / (entry price − stop loss); for a short: R = (entry − take profit) / (stop loss − entry). A result of 2, written as 1:2, means a potential profit twice as large as the risk. The risk on a single trade is sometimes called 1R.

R:R says nothing about the probability of success, so on its own it is not enough to evaluate a strategy. With a win rate of p, the expected value of one trade in R units is p × R − (1 − p), ignoring costs. A positive result therefore requires combining both quantities. A high R:R on paper often means a distant target that is rarely hit.