Module 6 · Risk management and psychology
R:R — risk/reward ratio
R units, the win rate you need, expectancy and profit factor with numbers; how partial exits change R and how to set realistic targets.
11 min
Why think in "R"
Two traders each made $300. One risked $100, the other $1,000. Same result, completely different quality. That is why it is handy to measure results not in dollars but in units of risk.
What 1R is
1R is the amount you lose on a trade if the stop is hit. Per share: entry − stop. For the whole position: that number × the share count.
Every trade's result is expressed as an :
result (R) = (exit − entry) ÷ (entry − stop)
Example: entry $50, stop $48 (1R = $2):
- sell at $53: (53 − 50) ÷ 2 = +1.5R;
- stopped at $48: −1R;
- out at $47.60 because of a gap: (47.60 − 50) ÷ 2 = −1.2R.
Results in R let you compare different accounts and stocks at different prices. The Limitup also computes the result in R when you enter the planned stop.
The R:R ratio
is the potential profit divided by the amount at risk:
R:R = (target − entry) ÷ (entry − stop)
Stop $2 below, target $4 above: two dollars of expected reward for each dollar at risk.
The example on the chart: entry $50, $48, $54.
- risk: $50 − $48 = $2 (1R);
- reward: $54 − $50 = $4 (2R);
- R:R = 4 ÷ 2 = 1:2.
With a $56 target the reward is $6 and the R:R is 1:3. Hit the target and you make +3R; get stopped and you lose −1R.
The win rate you need
With a high R:R you do not need to win often. The needed to break even:
required win rate = 1 ÷ (1 + R)
- 1:1 → 1 ÷ 2 = 50%
- 1:2 → 1 ÷ 3 ≈ 33%
- 1:3 → 1 ÷ 4 = 25%
Formula: 1 ÷ (1 + R). The higher the R:R, the fewer wins you need.
So at 1:3, winning just one trade in four still breaks even.
Including costs
The formula ignores commissions and . In reality they shave a little off every win and add a little to every loss. Example: 1:2, $50 risk, $2 total costs for entry and exit. A win is $100 − $2 = $98, a loss $50 + $2 = $52. Breakeven = 52 ÷ (98 + 52) ≈ 34.7% — not 33%. The smaller your risk, the bigger this gap.
Expectancy: the real quality of a system
Neither win rate nor R:R means much on its own. The number that combines them is : the average result per trade.
expectancy = win rate × average win − (1 − win rate) × average loss
Let's compare three systems, each with 1R = $50:
The rest of the lesson — with a free account
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Later in this lesson
- How partial exits change R
- The target must be realistic
- Common mistakes
- Checklist
- A 7-question quiz (60% to pass)
- Practical task: Try the R:R calculator